In yet another sign that the economic downturn can gobble up companies small and large alike, Bloomberg is reporting that General Growth Properties, the owner of such prime properties as Faniel Hall and the South Street Seaport, filed the biggest real estate bankruptcy in U.S. history. The company had accumulated “$27 billion in debt during an acquisition spree that turned it into the second-largest shopping mall owner.”

ended a seven-month effort today to refinance its debt. The company listed $29.5 billion in assets and debts of about $27.3 billion in the Chapter 11 filing. General Growth will continue operating its more than 200 properties. “We intend to emerge as a leaner company,” General Growth President Thomas Nolan said in an interview today. “We want to come out as a less leveraged company. Our business model remains strong.”

General Growth collapsed after spending $11.3 billion to buy commercial-property developer Rouse Co. in 2004 only to get caught in the credit crunch and a U.S. recession that has cut spending and property values. Banks have reduced lending amid mortgage-related writedowns. Commercial real estate prices in the U.S. dropped 15 percent last year, according to Moody’s Investors Service. Retail sales in the U.S. fell in March as soaring job losses forced consumers to pull back.

As I’ve been saying for many months, we’ve yet to see the full extent of what the housing crash, and ensuing economic recession, is going to do to the commercial sector; it looks like this is one of many signs. The Drudge Report today highlights another story, Report: Ground Zero Redevelopment May Take Decades, which details the delay in development of the WTC site, also partially due to the economic decline, and discusses fears that southern NYC can’t fill several new massive skyscrapers with tenants.

So . . . to those who say that we’re at bottom, what say you now?

Are we going to see other major developers, REITs, and commercial owners fall victim?

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Tags: business, Commercial Real Estate, faneuil hall, real estate, recession, Shopping mall, South Street Seaport

Tags: 1973 recession, Gerald Ford, recession, win buttons

Could anything be worse than the foreclosure crisis? People who purchased more expensive homes than they could afford or used risky mortgages to obtain them are losing their homes in record numbers. Banks who aggressively pushed loans on poorly qualified borrowers are suffering the consequences. The economy has been dragged down by the crisis. Will this be the last financial crisis? Unfortunately, no.

While mortgage debt in this country is somewhere in excess of $10 trillion, it is secured by the underlying real estate. While lenders suffer losses in the foreclosure process, they do generally recover something. The looming problem is with consumer debt, both secured and unsecured. Secured debt would be auto loans and other obligations backed by an asset. Like home mortgages, the assets could be repossessed if the buyer defaults and the lender stands to make at least a partial recovery.

It is the unsecured debt, mainly credit card, that is looming as a huge problem. According to the Federal Reserve, consumer debt was more than $2.55 trillion as of December 2008. Almost $1 trillion of that was revolving (credit card/line) debt. It is the unsecured debt that is the riskiest form for the lender. It can be wiped out through bankruptcy or otherwise be difficult to collect when a borrower defaults.

Unprecedented Growth

In 1999 consumer debt was approximately $1.5 trillion, ten years later it is 70% higher. Household income has been fairly stagnant during this same period of time. What does this mean? It means that people have been using credit to fund a lifestyle that is higher than their income would justify. Big surprise.

Just as they did with mortgages, banks have aggressively marketed credit cards, often to people who shouldn’t have them. Their insatiable thirst for bottom line profits have left them with another time bomb of “toxic” assets. As the recession deepens more and more of these borrowers will default. People are using credit cards to hang on to a standard of living that no longer exists. What will they do when there is no credit left on those cards?

Foreclosures are a much more visible consequence. Vacant houses with for sale signs with a banner reading “bank owned” illustrates the situation clearly. Credit card defaults aren’t so easy to spot but the consequences are just as ugly. Many banks will have their ability to lend impaired or fail altogether because of this. Just another turn in the downward spiral we are in.

The Cash Standard

The country as a whole needs to return to a time when we saved to buy what we wanted instead of expecting instant gratification. Credit should be used for emergencies, and a 50% off sale at Macys is not an emergency. The paradox is that for the economy to recover consumers need to spend money. The Government understands this and indicated as much with the tax cuts in the recent stimulus package. Rather than sending people checks as they did in 2008, the cuts will show up in weekly paychecks. It is such a small amount that, in theory, people will just spend it and it will stimulate the economy. We’ll see how it works out this time.

In his book, The Total Money Makeover, financial guru Dave Ramsey advocates using cash instead of credit or debit cards. Studies have shown that people will spend significantly less when paying with cash as opposed to plastic. He is also a proponent of living a debt-free lifestyle and advises people to eliminate their debt as quickly as possible.

Try this challenge: for the next week leave the credit and debit cards at home. See if you spend less by using cash. More importantly, see how much more attention you pay to your purchases.

Debt, n. An ingenious substitute for the chain and whip of the slavedriver.
– Ambrose Bierce

Tags: credit card defaults, credit crisis, dave ramsey, recession

Consumer confidence reached an all-time low and 100,000 Americans were issued layoff notices last week, each playing a role in the mortgage market’s relative worsening. />

For the third consecutive week, mortgage rates rose and average loan fees increased, too.

Amid all of the negative economic news, however, there were two bright spots worth identifying and discussing. They show that country may be closer to economic recovery than expected.

First, the supply of “used” homes for sale fell from 11 months to 9 months nationwide. This suggests that homebuyers are re-entering the housing market in force, a signal that home prices are nearing equilibrium.

And, second, the nation’s GDP — a measurement of the country’s complete economic footprint — didn’t fall by nearly as much as what the experts had predicted. A positive surprise like this makes us wonder about what else the Doomsday Economists may be wrong.

We won’t have to wonder long.

With this week comes copious amounts of data, legislation and rhetoric to influence mortgage rates. Some of the news-bites that mortgage markets will digest this week include:

• The Personal Consumption Expenditures Index report. PCE is a preferred inflation measurement and inflation is the enemy of mortgage rates. A high reading will pressure mortgage rates up.
• Retail stores report on same-store sales.
• The Pending Home Sales report. This notes the number of “homes under contract” and is a good gauge for buyer interest and the general health of housing.
• 20% of the S&P 500 firms will report earnings.
• Congress is expected to vote on the Stimulus package.

The biggest impact on rates, however, could come on Friday with the release of January’s jobs report. Employment data is always market-mover and with the press giving so much attention to layoffs lately, expect Wall Street to be extra jittery it.

Markets expect the economy to have lost a half-million jobs last month.

(Image courtesy: Wall Street Journal Online)

Tags: Economy, GDP, mortgage rates, recession

If you saw the Dec 14, 2008, 60 Minutes broadcast featuring a segment titled, “A Second Mortgage Disaster On The Horizon?” you’d probably be scratching your head asking yourself when this meltdown will end.

The segment had Scott Pelley interviewing Whitney Tilson an investment fund manager who is supposedly the new guru on the mortgage bubble explosion.

Tilson is part of Amherst Securities. Amherst is an investment firm specializing in mortgages. Amherst is widely regarded as mortgage and financial detectives. If a guy was going to be funny he could call them the CSI of the mortgage trade. On the other hand, what isn’t funny is the possibility Tilson’s predictions that Alt-A and option ARM loans are about to add to the already huge pool of misery.

He says his data tells him that even though there are the billions of dollars in sub-prime mortgages that reset last year and this year, the full impact of the Alt-A and option ARM resets haven’t hit yet. Tilson says this has the potential to add another $1 trillion in Alt-A mortgages and about $500 to $600 billion in option ARMs to the pool.

I guess if this actually happens we could say we are now talking about real money given all of the bailout dollars being bandied about and given away like they were food samples at the local big warehouse store. The ha ha part to this is that food samples seem to be harder to get than dollars.

Misery On Top Of Misery

To make matters worse, a lady named Sean Egan was also interviewed. Egan runs a credit rating firm that analyzes corporate debt. So do a lot of other people. However, Egan has been cited by Fortune Magazine as being one of six Wall Street pros who predicted the fall of the financial giants. Her expectations for 2009 is that it will be miserable and 2010 not only miserable but probably even worse.

Now this flies in the face of what all the federal government talking heads were, and are, saying. From the Prez on down, the word is recovery begins to happen in mid 2009 and continues through 2010 when the worse should be over. Personally I believe the private sector talking heads but that’s me.

Tilson did do some propagandizing for the stock market but this post isn’t about the stock market, it’s about real estate. It seems to me if these two people are anywhere near the bull’s eye of accurate prognostication, real estate bargains will be available for at least two years. Given that is true, it seems we need not be in a rush to buy a property simply because it is way below market. After all, there will be a new glut of inventory in the very near future that will further depress prices.

My Plan

I don’t know about you, but I plan on saving all my nickels and dimes for the new year’s real estate fishing trip in my back yard. I should be able to land a few whales. I can only speak for my back yard which is Nevada, the leader in foreclosures, but I would imagine whales are alive and well in every market.

I define whale as that house today going for at most 40% (flexible to 45%) of the 2006 price. 2006 is my arbitrary date. Pick your own.

I won’t go into my data analysis method because you undoubtedly have your own. If it has worked well for you in the past, it will work well for you in the future. Good luck and may the real estate gods smile on your new year of opportunities.

Photo Credit: Tim Morris

Tags: bailout, Economy, recession, recovery, stock market

The week’s most talked-about story hit the wires Friday.

According to the government, the U.S. economy shed 533,000 jobs last month and the national Unemployment Rate rose to 6.7%.  This was the largest number of jobs lost in any one month since the recession of 1974.

In a normal market, job losses of this magnitude would have caused stock markets and mortgage rates to fall.  But stocks and rates didn’t fall Friday.  To the contrary, both rose.  This is because — while the jobs reports was the most talked-about story last week — it wasn’t the most important one.  That story had already been told.

Last Monday — officially — we learned that U.S. economy is in recession.

Although most of Wall Street knew it already, the official determination was an acknowledgement that “bad economic data” is not only acceptable, but normal given the current conditions.

In other words, when the jobs data was released Friday morning, one reason why mortgage rates rose was because markets somewhat shrugged off the data, saying: “Yeah, of course job losses are up – we’re in a recession, after all.”

This is an unfortunate development for rate shoppers because bad data usually anchors mortgage rates lower.  Going forward, that won’t likely be the case — at least until the recession is declared to be over.

This week, without much new data being released, markets should trade largely on news of federal intervention and expectations for the U.S. economy.  As retail sales figures drip in from the weekend, be wary of stronger-than-expected numbers as that could pull mortgage rates higher.  The same goes for Friday’s official Retail Sales data for November.

Either way, expect volatility throughout the week — same as we’ve seen all year long.

(Image courtesy: Wall Street Journal Online)

Tags: Economy, housing, job losses, recession, unemployment, Wall-Street

A friend of mine sent me to this website: National Priorities Project

The headline on the page reads:

National Priorities Project analyzes and clarifies federal data so that people can understand and influence how their tax dollars are spent.

There is a link titled Affordable Housing Units on the page that tells you how many affordable housing units your city, county or state could have built had the money not been diverted to the war.

Since I live in a state where the foreclosure rate has been, and is still hovering around, 1 in 43 households, I wondered to myself if those dollars could have been used towards helping people keep their homes never mind building more. Or perhaps, those dollars could have been better used to maintain the infrastructure (bridges, roads, etc.) or better used in the education arena or better used well, just about anywhere else.< !–more–>

I am not endorsing the above website nor am I saying they are 100% on the mark. What I am saying is if this website is even 50% correct, do you suppose a percentage of our problem lies in the way our politicians throw away our dollars.

As it turns out, my eye wandered around on their home page and once again landed on their title line. Right there in plain view I saw a most glaring error. The website owners actually believe the PEOPLE not only can understand but influence how their tax dollars are spent. Obviously the website creators aren’t from Nevada…

The first and last time the people thought they could influence the way the government spent tax dollars, George Washington was president and he had to use soldiers to quell the rebellion. That’s right, the father of our country used armed force to crush the people’s spending wishes.

It appears the politicos have only changed modus operandi between then and now. Instead of using soldiers, they use foreclosure, bankruptcy, outsourcing, bailouts and other financial tools and ploys to quell the rebellion.

What rebellion you may be asking.

The rebellion symbolized by our children being displaced in the work force by people who have to sneak into the country under the cover of darkness rather than walk in during the day. The rebellion symbolized by gutless weasels like Mike Nifong and Jeremiah Wright.

I could go on with examples but I will spare both of us. All we have to do is open our eyes and there they are right in front of us.

I believe we instinctively know the only thing that keeps us from becoming a Zimbabwe or Beirut is trust. We trusted our representatives to do the right thing and they didn’t. Rather than keep the scoundrels from recreating another Savings & Loan crisis, they actively participated in giving birth to S&L revisited.

Unless you are completely devoid of feelings or thought, you know I’m correct. Trust is really all we have. We have to trust those we put in charge of the national treasury. We have to trust those we let make important, life changing decisions. And, we have to trust in each other.

Otherwise we will have 1 in 43 households not only in Nevada but in Texas, Florida, New York and every other state that starts with a letter of the alphabet.

P.S. Next week I will present a solution to the mess we are in that I think is absolutely on the money (no pun intended).

Tags: Economy, Foreclosures, Housing, money, politics, public policy, real estate, recession, S&L