We all know 2012 is a year of maximum uncertainty. To help sort through the fog here are some stats and some thoughts as to where we are and what might be the events of 2012 or not. GDP is likely to end 2012 between 2% and 2.5%. There is nothing on the horizon to suggest a major good news event. However there are numerous black swans that could cause this to be less. Iran, the removal of Greece from the Euro, a collapse of a French or Italian bank, some really dumb event staged by North Korea trying to get attention.
Foreclosures are likely to increase now that the servicing robo signing hoopla by Washington seems to be more under control. It was never a real problem but it made the administration and Cordray happy to create an issue. There are about 3.5 million homes in foreclosure, down form 4 million, but still a very long way to go. As a result house prices will decline another 3%-5% in 2012 so lot prices will not likely rise much for now. With ownership no longer the goal of many and so many houses coming back to market for rent, then add a lot of multi which will get built over the next several years, and homebuilding and lots will not likely be a good place to be.
The financial services sector will continue to be under withering attack from Obama and the Dodd Frank acolytes. While this will change when Romney is elected, the damage is happening now and it will take years to recoup. The big bonus glory days are gone for a long time and jobs will not be plentiful in investment banking or lending for a few more years. Costs for banks will continue to rise as more and more regulation is enforced and capital requirements are tightened. Wall St is never going to be the same. There are less big institutions and it is harder to make big spreads. Bonuses will be constrained for a long time. That translates into lowered demand for condos, resort homes, less big events by banks and less fancy hotel stays. The trickle down, especially in Manhattan residential and entertaining will continue to be felt for quite awhile.
As a result of the continued decline in property values, property taxes will continue to drop. That means continued pressure on local and state government for years to come. Add to this the massive pension burden which has no way of being met, and the cutbacks and space requirements for governments has to decline. It also means government services will continue to be reduced and fees of all sorts will rise. Doing development will likely take longer and filing and other fees will rise.
This is one of the generational recessions which impact behavior for generations to come. Just as my parents never really recouped mentally from the depression, it is very likely most people in the world will be badly enough shaken by these events for a long enough period that it will impact behavior. Rental is now seen as a very acceptable way of living. Home equity loans are no longer really available, but that means less big vacations, less big screen TV’s and less of everything for the average family. While consumer spending may be rising, it cannot resume the gross over spending of 2006-2007.
Tax reform is the absolute right thing to do but it is far from clear that Congress can ever overcome the special interest pressures to do it for real. Maybe a few nips on the margin so they can say they did something, but it is unlikely we will see real reform which is desperately needed. Instead we will see some rise in taxes at the top end because the 47% who never pay any tax will vote for that.
There is a growing unemployable segment of the population as long term unemployed grows to millions and the extension of unemployment insurance just keeps them unmotivated in some cases. There is also a growing number of graduates who just cannot get a job and they will be overtaken in a couple of years by the new crop of graduates. This is a major demographic problem and will likely lead to major social issues and entitlement fights.
Nobody knows what Europe will do or when. Greece cannot survive no matter if the bonds are cut 505 or 60% or whatever. It is so corrupt and inept that it just cannot make it without a exit from the Euro and a gut wrenching devaluation. If Greece and Italy do not change their corrupt and non function way of doing business, then they cannot make it. They have to fail. The only question is can they really change or when do they really collapse, and what are the social upheavals that go with the collapse. This is how Hitler, Mussolini and Putin came to power. It is not out of the realm of possibility that the social unrest can mushroom just like the Arab spring did. Europe is a massive land mine. So step carefully if you are buying paper in Europe. There is just no way to know what will happen over the next 3 years.
The good news is the US will continue to be the one place in the world where there is political stability such as it is. The Fed will make mistakes, but it is in control of the whole of the US dollar system. US Treasuries and assets will grow in popularity for flight capital which will increasingly come here. Al of this is good for US real estate over the next 5-7 years. The US is the one place in the world where rich guys can feel safe.
Barring some major black swan crashing, like Iran, it is likely that the US GDP will be much improved by 2015 and real estate values will be higher. 2012 is likely to be a very good year to be buying distressed debt and assets and doing some reno and holding for 5 years. It may be the best bet on the planet given all the other awful things likely to happen everywhere else.
The again, nobody really knows.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
