It was about this time last year the storm clouds were gathering. People in the debt markets were getting nervous, the subprime mortgage market was collapsing as housing prices declined and interest rates ticked up. The National Realtors and other trade groups had earlier prognosticated housing prices would be increasing by then and that any housing downturn would be shallow, but no such luck. Despite the CDO market blowing up and widening CMBS spreads many players put on brave faces and figured the credit markets would settle down in a few months (by year end) and the strong fundamentals in commercial real estate markets would hold the day. It would be a repeat of the 1998 Russian credit crisis, some short term pain, but a bump in the road.
Then we had Citibank reeling, Merrill Lynch firing its CEO, one large investment banking writedown after another, the Bear Stearns debacle, rumors about Lehman Brothers, and now in short order the IndyMac collapse and pending Fannie/Freddie bailout. The idle talk on the street is that more regional banks will tank as defaults and foreclosures ramp up in both the residential and commercial sectors, and inevitably a major money center bank will go down for the count before we hit bottom.
It's become painfully clear that all our financial institutions are trying to "slowly bleed the pain" from excess bad loans across all asset classes and lending arenas. "If they did it all at once, it would immediately crater the entire system," one mortgage banker observed to me last week. But now with confidence waning in Freddie and Fannie the bleeding is getting excessive. The system increasingly leans on the federal government (taxpayers) to help suture all the wounds before they gush. And the government appears to have no choice but to come to the rescue first with Bear Stearns and now with the GSEs. Who will be next? There's more to come.
What the credit industry tried to paint last summer as a limited problem involving a few renegade lenders and poor people who should never have been given loans in the first place cuts across excessive lending and out-of-hand fee-for-all infecting the entire global system. So where will we be next summer? You hope we will have hit bottom -- that all the bum investments have been identified and accounted for. But what seems increasingly clear -- we have a ways to fall before financial institutions can come to grips with the dreck in their portfolios. In the meantime what will be the final bill for taxpayers, the impact on the federal deficit, the effect on the dollar, and the toll on inflation. It's a witches brew that doesn't inspire confidence. And that may be our biggest problem.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
