For some reason I haven’t seen this: a comparison of commercial real estate prices from Moody’s/MIT with housing prices from Standard and Poor’s/Case-Shiller. Here it is:
Standard and Poors, Moody’s From my perspective, the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble.
On a vaguely related note, I was wondering if you wish to weigh in on the issue of strategic default, a.k.a walking away, as recently discussed in the Sunday Times by Roger Lowenstein.
In particular, about the views of one Brent White that “upside-down” homeowners should be encouraged to strategically default , Lowenstein writes, “it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.”
I think quite the opposite is likely. With the political influence of the TBTF banks at an all time high, they will probably get Congress, with the tacit backing of Obama, to make “walking away” more onerous and difficult.
Ponzi finance stage of Minsky’s financial instability hypothesis.
Those whose learning years were during the unprecedented 1980-2000 bull stock market may just be bubble minded – once prices start going up they can’t believe they will ever go down.
I agree that blaming F&F and CR is absurd, but the residential and commercial markets are hardly independent and if something triggered a bubble in residential, this could in turn lead to a bubble in commercial. The time lag is consistent with this.
But,,,,but….but, there have been countless, innumerable scads of sound-bites from stereo-typical central-casting Senators (usually former builders or bankers) pontificating on how all the problems were caused by un-qaualified people getting NINJA loans forced on the lenders by the vast, evil Freddie and Fannie and the hated CRA standards.
What would any of that scenario have to do with a CRE bubble involving only bankers and real estate developers – just professionals acting professionally ?
There must be some way to refute such empiric evidence presented with great visual aids – this is not part of the script we sent to all the usual suspects, er, I mean ‘the serious people !
While I agree, the obvious response of detractors would be that commercial real estate values went up and down in response to housing. That is, it went along for the ride even though it was not a contributing factor.
Unfortunately this could be the truth, even if low income loans have nothing to do with the problem.
In regards to low income loans, I will note that the world did not stop over mortgages. It stopped over Lehman Bros. and others mismanaging their portfolios to the point, whatever the underlying investments were, that their failure ground the money markets to a halt.
It matters not what was happening at Fannie Mae et al, these “masters of the universe” still blew it. It was their job to figure out what’s happening before it happens, hence why we MUST pay them their bonuses.
Paul, this gets down to a good bit of investing advice I got from a rates trader – if stuff is getting very correlated then its credit driven and therefore temporary in the long term but very powerful in the medium term.
“From my perspective, the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble.”
Um, a lot of CRE — probably most of CRE — is construction of homes and residential developments. Don’t get me wrong, I think the Community Reinvestment Act had nothing to do with the crisis, and Fannie/Freddie only fanned fires started by Wall Street, but this argument by Krugman most definitely is not evidence of these conclusions and only shows that he has a substantial ignorance of what constitutes CRE.
Predatory or not predatory any given loan can still be stupid. Of course it should have been obvious with many of the home loans. Less obvious would have been the commerial loans I concede though bankers could have seen some worrisome data if they had looked harder.
Ummm, so now it’s okay to aggregate Flatland and Zoned Zone data together? You just told me that was a sign of sloppy thinking, Paul. You just very publicly chastised Bernanke and the Fed for not taking into account regional variations in housing prices. But now, that it proves you were right, it is a-okay!
How do you answer those who say Fannie/Freddie/Community Reinvestment caused the housing crash, then the housing crash caused the CRE crash?
I remember my father returning from his savings bank’s investment board meeting one evening a quarter century ago fuming because the bank had invested in an out of state housing development project with no one from the bank ever seeing it. The answer he got was why was that necessary when 300 other banks were participating. Of course they lost a bundle. Don’t blame Fannie/Freddie. Monkey see, monkey do. No offense to monkeys.
Here was me thinking that the land that houses sit on and the land that sits under commercial property is pretty much the same….
…obviously not.
The CRE bubble was encouraged by some of the same elements as the residential bubble. Most bubbly were the securitized loans given by sub-prime commercial lenders such as Bayview Capital and their affiliates.
These loans eschewed the traditional CRE measures of income and capitalization rate and instead used the (typically higher) market value of property to underwrite loans at higher interest rates, with less documentation for borrowers in the small balance commercial space.
Meanwhile, the collapse of Lehman Brothers alone, depreciated medium and large commercial properties by 25% almost literally, overnight. Capitalization rates jumped 200 basis points when Lehman melted away, and projects across the country got thrown into chaos making the Bear Stearns euthanasia look downright minor in comparison.
Maybe. Or, one could read this graph as indicating that the housing boom was fueling the commercial real estate boom.
You may be right and Fannie/Freddie/Community Reinvestment and predatory lending may not have caused the housing bubble, but I don’t get that from this graph.
I think an even more important comparison is the international one. Europe, Iceland & Australia can’t blame their housing bubbles on any US housing policy.
I would just like to mention, for the record, that the chart is missing something. Take a look at August 2005.
On august 8th 2005 “That Hissing Sound” was published by Paul Krugman calling the top in the housing bubble.
It began:
“This is the way the bubble ends: not with a pop, but with a hiss.”
And it end’s:
“Now we’re starting to hear a hissing sound, as the air begins to leak out of the bubble. And EVERYONE – not just those who own Zoned Zone real estate – should be worried.” (my emphasis added)
I remind people of this is because it firmly establishes Dr, Krugman’s credibility on this subject.
An economist who can forecast markets-VERY rare indeed.
You don’t think the price of residential real estate has an impact on commercial?????
Fannie/Freddie/housing bubble, and predatory lending are all symptoms/product of the easy money policy, Greenspan style.
I have to wonder just how much of the CRE bubble was blown up by the tech boom and bust? And what kind of an affect has the subsequent outsourcing of all those new tech jobs had on the continuing CRE slump?
Housing will rebound, after all everyone needs a roof and the population is growing. But if we aren’t adding jobs what good are all those new office parks?
The bubble in Phoenix and las vegas were due to population increases. Both cities were among the fastest growing in the nation and at the top of the bubble housing starts could not keep up with that growth. I heard a congressman from Nevada say that his seat was pretty safe because more than half his district would be new by the time the next election would be held.
Will housing go back to the original trajectory when the ivarious stimulus measure run their course? Will It follow commercial in to the darkness. We very well may be doomed!
Can’t the CRE growth be an effect of the residential bubble? That would be one way to read the time lag between plots. If you’ve got a whole new sub-division going up, it’s going to need a grocery store, a gas station and half a dozen Starbucks.
Ok. What was the # 1 reason for the broad based bubble?
Low interest rates?
Hey, I too subscribe to the Rick Santelli Theory of Loans Gone Bad: the American people are born suckers, their childlike gullibility is solely to blame for this national dilemma, and American homeowners that find themselves underwater deserve the waves of terror that will be visited upon them.
Predatory lending indeed. I would much rather collapse as a nation-state than to lift one finger to protect my citizens from their own foolish inclinations.
Aren’t you confusing cause and effect, though? I’m not saying that you are, I’m just saying:)
(both share the same, limited developmental capacity, land, and even are somewhat interchangeable)
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