Monday, July 27, 2009

Starting a recovery in a recession

Are we in a recovery?.....this is July 2009, the beginning of the slow season for real estate. How can we be in a recovery during the almost certain summer slow down.

Obviously the peak of the residential home sales season revolves around the end of school so that the old homestead can be sold in time to move into and get settled in the new homestead. But once that wave of sales is over, in some markets, the activity ends. Of course, this being New Orleans, we don't follow trends like the rest of the world. But will this time be different?

First, if you believe that we are in a recovery, you must believe that real estate drives the recovery, or is at least reflective of it. You also realize the economic benefit of a real estate transaction. Each one being a mini-development that creates sales at retailers, employs contractors, a/c repair men, movers and lawn maintenance crews. It an appreciating market, a transaction increases tax revenue by automatically reassessing property values. Therefore real estate sales act as an economic stimulus. What a concept.

So if the real estate market is soft and its a buyer's market and deals abound, then where is the recovery? Where is the boon? Where are the bottom fishers? Where is the money sitting on the sidelines waiting for the bottom?

Maybe this is not the bottom. If you can recall the S&L crisis(that means your old), the core of that recovery was not just good deals on real estate, it was GREAT deals on real estate. Deals that brought out not only the bottom fishers, but the sideline money and young whippersnappers such as myself who saw more than just a bargain, they saw real upside potential. That is whats missing from this premature call on recovery.

Sure, you can get a good price on a rental or development project, but where is the end user? Where are the tenants? Are the new and renovated apartment complexes full or at 60% capacity? Maybe 60% is a good thing.

And if commercial follows residential, where are the retailers? They may be out there if they are selling drugs(the prescription kind that is). But other than drug stores or a fill-in fast food store or a discounter providing the only lighted store at night, there is little demand for new space. I think you can find a few vacant Circuit City or Linens and Things spaces around town. My favorite is a brand new shiny shopping center with for lease signs symmetrically placed in each window like guards standing watch waiting for that car to drive in and write down the leasing phone number.

This isn't painting the picture too bleak. Its simply is a broader view of what is happening on the ground versus what is happening on Wall Street.

The trickle down of the mortgage/financial bailout has started flowing back up the hill. The trickle down would work if it did what it was designed to do, which is cover the loss to the lender when a toxic asset(real estate) was sold at a loss. And its sold at a loss when a buyer gets a GREAT deal. Except the lenders are not giving anything away this go around, no S&L fire sales to clear the assets off of an insolvent banks balance sheet. Nope, this time they are trying to get market value so that they aren't the ones going back to Uncle Sam hat in hand. The public outcry of the bail out is having an effect on lenders this time. And now they choose to be responsible and not give anything away. Great, just when we need them to open up and lend and make deals, they shut the door making it exponentially more difficult to get a loan or a good deal on a foreclosed home. Its like watching a movie in reverse.

So since the GREAT deals aren't out there, and few can borrow, no one is knocking the door down to buy real estate. No real estate sales, no economic churn and a very, very slow recovery.

But at some point, a recovery has to start, even if we don't see it. And what better time than in a recession. Oh, I guess that's the point.