The Decline Of Asset Values And The Economy

When stock prices and home values go up, investors and consumers feel the wealth effect and begin to invest and spend. That helped to drive the froth of the middle of the decade. Despite the near historic rise in stock prices from March 2009 to May 2010, and what appears to be a bottoming out of home and commercial real estate prices, there is not a widespread value increase which makes people and investors feel good. Stock prices are still down around 25% from the peak. 401K’s are still badly damaged. The average investor has lost confidence in the stock market as an investment and savings vehicle. Home foreclosures will continue at very high levels for another year or maybe more since unemployment is not likely to improve much for at least several months or longer. Home owners who are under water are still going to be underwater a year or two years from now. The result is the average consumer is not going to start spending a lot again for a long time.

There is still severe value destruction in commercial real estate . Whether values are down 40% or 35%, is really not materially different. Owners are still struggling, and extend and pretend is still the order of the day. Everyone hopes it will get better soon, but there is no reason to believe there is going to be a sudden widespread uplift in commercial real estate values. Maybe in the 5 major cities and especially in Manhattan, but not in the rest of the country. Lenders are correctly still very cautious. Regional and small banks, the backbone of small and midsize real estate lending, are still saddled with serious burdens of both residential and commercial real estate problems. They have no way to raise substantial new capital given the state of the economy and the terrible attitude coming out of the administration toward banks. CMBS has had a tiny, but so far meaningless start. Even if this year reached $10 billion of new issuance, it is a rounding error on the scale of what is needed, and it has almost all been to borrowers who have strong organizations and good balance sheets. CMBS is not going to solve the refi of the average commercial property owner for several more years. The result is asset values generally will not increase materially for possibly 2-3 more years because there is simply not the ability to refi or justify the higher values. Rents are not going back up to former levels for office or retail for several years, and secondary cities are simply not attracting the investors at the prices that sellers are trying to achieve.