Economic Stabilization: What Happens Now?
The immediate impact of the new economic stabilization bill, signed by President George Bush today, will be renewed confidence in the market, two real estate experts said in separate interviews with the editors of REALTOR® Magazine. But don’t expect credit markets to turn around tomorrow. The recovery process will take time, say Kenneth Riggs, head of the commercial real estate analysis firm Real Estate Research Corp. in Chicago and Gary Keller, head of national residential real estate franchisor Keller Williams in Austin, Texas. We asked Keller about the impact of the credit crisis and the stabilization bill on residential real estate, and we asked Riggs for the same analysis from a commercial real estate standpoint.
REALTOR® Magazine: Now that both the House and the Senate have passed the stabilization bill and President Bush is set to sign it, what can we expect the impact to be?
Gary Keller: The market should regain some confidence, and since markets are built mainly on confidence, that’s no small thing. In fact it’s a huge thing and it’s imperative for the market to move forward. But beyond that, we have to wait and see. Although the intent of the legislation is to free up capital for lending on homes, cars, college, and business inventories, the government doesn’t have a mechanism in the bill for making the banks turn around and lend the money back. So no one knows what will actually happen once a bank has its capital freed up.
Kenneth Riggs: Well, it should give calmness to the financial markets by showing that we will in fact work through this crisis. That said, I don’t see the fundamental, or the mechanics, of capital changing right away. That won’t happen until we see how this package will actually operate and how well Treasury can do in buying and then selling the securities. So, the immediate impact would be that the market should at least breathe a sigh of relief. The next step will be to give a foundation for the credit markets to start functioning a little better. We will never get back to the level that we were a year ago; that’s part of the market cleansing itself of a culture in which capital was just too available and too cheap. The bill, too, is raising the FDIC insurance limit for bank deposits to $250,000. Many people will say, “Well, the small person might not have that much.” But it’s really small businesses that are being addressed here, and they’re what run our country. This will allow small companies like a lot of real estate brokerages to start focusing on their business, rather than the credit crunch, and to concentrate on how they can become productive.
RM: What are conditions on the ground now? Is anybody getting a loan, and if so, who and at what terms and costs?
Keller: We’re not seeing any properly qualified buyer being turned down for a loan. But even more important, every foreclosed home automatically has financing on it, from the bank that owns it. From a buyer point of view, this is the market we’ve all been asking for. In most cities it is one of the greatest buyer’s markets we’ve seen in a long time. From a seller’s point of view, it varies. If someone bought a home in the last five to six years and put little to nothing down they might not be in a position to sell without bringing money to the table. But if they want to move up, this is the perfect time to do it. Any loss they take on the sale could very well be made up on their new purchase.
Riggs: Two months ago commercial real estate was actually doing reasonably well. Transactions were happening, though they were slowing down. But today people are pushing away from the table, both on the debt and the equity side. Very well seasoned institutions and investors that up until 30 days ago, before this free fall, were confident they could weather what was happening, now are just walking away. They’re not calling you back. People that committed to transactions are backing away. There used to be this reputational risk element to deals, but even the biggest players are saying, “No, I can’t stomach this” and just walking away.
RM: What other measures could the federal government take to help get real estate moving?
Riggs: There should be a close examination of this mark-to-market accounting. A lot of people say you can’t throw it out—this is the transparency we need—but the problem is, even if you read fair-market rules—and the SEC has sent out a clarification on them—it states that, if you’re in a market that doesn’t have [fair-value observations, then you can be exempted from basing valuation on what comparable assets are selling for]. Or let’s say that for residential the only observation you have are at fire-sale prices, what good is that accounting rule if you’re marking everything down to fire-sale prices? It doesn’t make sense. So I think that should be the next close examination and it wouldn’t surprise me if in fact that [exemption] isn’t extended for certain companies or financial institutions just for an interim period. I think that would be a wise choice because the fulfillment of fair-marketing accounting, while the spirit and appropriateness is exactly on target, [can’t work when you’re] in an environment like this one.
RM: What will be the most reliable sources of financing going forward? Local banks? At what terms and costs?
Keller: So far, it’s business as unusual. Lenders who have money are lending and banks that own houses are lending on those houses. The real estate market has actually shown signs of short-term progress. Beyond that, these are questions no one knows the answer to. In other words, we’ll know it when it happens.
Riggs: There’s still money out there for good product but its high equity, so you have to be prepared for the market only providing capital for those until we get through this period. The private market has to lower its expectations, require more equity, put up better underwriting, provide better disclosures, and price risk better. Even with this rescue, we’re going to go through a slow economic time, with high end unemployment, and it’ll probably last for six months. People will want to see the problem fixed tomorrow, but it won’t be. It could take a year and a half for us to get back to where the market is functioning so that people are comfortable that things have been priced right, the proper credits are available, you’re lending to the right individuals, and the right institutions. But it’ll take until 2010. I would anticipate the residential market will show some rounding out if we can get through this, probably toward the second quarter of 2009.
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REALTOR® Magazine: Now that both the House and the Senate have passed the stabilization bill and President Bush is set to sign it, what can we expect the impact to be?
Gary Keller: The market should regain some confidence, and since markets are built mainly on confidence, that’s no small thing. In fact it’s a huge thing and it’s imperative for the market to move forward. But beyond that, we have to wait and see. Although the intent of the legislation is to free up capital for lending on homes, cars, college, and business inventories, the government doesn’t have a mechanism in the bill for making the banks turn around and lend the money back. So no one knows what will actually happen once a bank has its capital freed up.
Kenneth Riggs: Well, it should give calmness to the financial markets by showing that we will in fact work through this crisis. That said, I don’t see the fundamental, or the mechanics, of capital changing right away. That won’t happen until we see how this package will actually operate and how well Treasury can do in buying and then selling the securities. So, the immediate impact would be that the market should at least breathe a sigh of relief. The next step will be to give a foundation for the credit markets to start functioning a little better. We will never get back to the level that we were a year ago; that’s part of the market cleansing itself of a culture in which capital was just too available and too cheap. The bill, too, is raising the FDIC insurance limit for bank deposits to $250,000. Many people will say, “Well, the small person might not have that much.” But it’s really small businesses that are being addressed here, and they’re what run our country. This will allow small companies like a lot of real estate brokerages to start focusing on their business, rather than the credit crunch, and to concentrate on how they can become productive.
RM: What are conditions on the ground now? Is anybody getting a loan, and if so, who and at what terms and costs?
Keller: We’re not seeing any properly qualified buyer being turned down for a loan. But even more important, every foreclosed home automatically has financing on it, from the bank that owns it. From a buyer point of view, this is the market we’ve all been asking for. In most cities it is one of the greatest buyer’s markets we’ve seen in a long time. From a seller’s point of view, it varies. If someone bought a home in the last five to six years and put little to nothing down they might not be in a position to sell without bringing money to the table. But if they want to move up, this is the perfect time to do it. Any loss they take on the sale could very well be made up on their new purchase.
Riggs: Two months ago commercial real estate was actually doing reasonably well. Transactions were happening, though they were slowing down. But today people are pushing away from the table, both on the debt and the equity side. Very well seasoned institutions and investors that up until 30 days ago, before this free fall, were confident they could weather what was happening, now are just walking away. They’re not calling you back. People that committed to transactions are backing away. There used to be this reputational risk element to deals, but even the biggest players are saying, “No, I can’t stomach this” and just walking away.
RM: What other measures could the federal government take to help get real estate moving?
Riggs: There should be a close examination of this mark-to-market accounting. A lot of people say you can’t throw it out—this is the transparency we need—but the problem is, even if you read fair-market rules—and the SEC has sent out a clarification on them—it states that, if you’re in a market that doesn’t have [fair-value observations, then you can be exempted from basing valuation on what comparable assets are selling for]. Or let’s say that for residential the only observation you have are at fire-sale prices, what good is that accounting rule if you’re marking everything down to fire-sale prices? It doesn’t make sense. So I think that should be the next close examination and it wouldn’t surprise me if in fact that [exemption] isn’t extended for certain companies or financial institutions just for an interim period. I think that would be a wise choice because the fulfillment of fair-marketing accounting, while the spirit and appropriateness is exactly on target, [can’t work when you’re] in an environment like this one.
RM: What will be the most reliable sources of financing going forward? Local banks? At what terms and costs?
Keller: So far, it’s business as unusual. Lenders who have money are lending and banks that own houses are lending on those houses. The real estate market has actually shown signs of short-term progress. Beyond that, these are questions no one knows the answer to. In other words, we’ll know it when it happens.
Riggs: There’s still money out there for good product but its high equity, so you have to be prepared for the market only providing capital for those until we get through this period. The private market has to lower its expectations, require more equity, put up better underwriting, provide better disclosures, and price risk better. Even with this rescue, we’re going to go through a slow economic time, with high end unemployment, and it’ll probably last for six months. People will want to see the problem fixed tomorrow, but it won’t be. It could take a year and a half for us to get back to where the market is functioning so that people are comfortable that things have been priced right, the proper credits are available, you’re lending to the right individuals, and the right institutions. But it’ll take until 2010. I would anticipate the residential market will show some rounding out if we can get through this, probably toward the second quarter of 2009.
FUENTE:REALTOR.ORG
SI DESEAS LEER DE ECONOMIA
http://www.pakatnamu1.com
OTROS PUNTOS DE VISTA
http://mirandopuntosdevista.blogspot.com
GRUPOS GOOGLE: QUINTO SUYO
http://www.groups.google.com
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