CURRENT TRENDS AND 2010 FORECAST

The USA Federal Government is just now beginning to understand the depth of financial crisis created by the wildly excessive volume of sub-prime residential lending and Wall Street’s manipulation of the financial markets with securitization of these and other commercial real estate loans, derivatives, and other complex financial instruments. As a result, our national economy is still struggling to regain its balance like the “punch drunk’ boxer trying to get back on his feet.

Based upon our analysis of the US banking system and its challenges to regain credibility and purpose, as well as our daily experience in the real estate industry, we foresee the following in 2010 and most of 2011:

  • The FDIC and Treasury Department still have more than 350 insolvent community and regional banks in need of restructuring, a tough “work-out” challenge that will take at least another two years to resolve. Deeper write-offs than expected will occur.
  • Interest rates will remain low for at least the first half of 2010 as the Fed tries to nurse the banking system toward solvency.
  • Unemployment may dip to 9% as the government stimulus package helps in some areas, but the rate could just as easily stay the same or even increase to 11% or more when the realization sets in that the government spending can not do it all with the banks on the side lines “licking their wounds”.
  • While the credit binge and the baby boomer spending dropped dramatically back in 2006, we are only now feeling the impact of the banking crisis, totaling upwards of $1.3 trillion in commercial real estate loans coming due (with over $60 billion of these in default now) and more than $2.5 trillion in residential loans inflated well in excess of current or even near term future market value. Millions of these loans are currently non-performing and clogging the courts in the foreclosure process.
  • In the seriously over built residential markets like California, Nevada, Arizona, and Florida, the rental apartment sector of those markets, is currently and will continue to be the strongest, as the banks, courts, and our government deal with the overwhelming number of single family and condominium foreclosures in those states. Some Florida and California apartment sub-markets had occupancy levels in excess of 95% as of January 2010. Look for additional increases in these occupancy levels as well as 3% to 7% rent gains in the next 12 to 18 months, due to limited new apartment construction.
  • While chasing “distressed assets” will continue to be the favored thrust of private investors and hedge funds, many of deals are really tough to work out due to the relative absence of buyer and consumer demand. If you buy a deal at 25 cents on the dollar, it’s still a real 25 cents plus reserves, and what are you going to do with the asset? Some winners, some losers, with many investors remaining on the sidelines.
  • On an individual and bulk basis, some of the single family and condominium below cost and market buys in 2010 may not be seen again for at least another generation, but these bargain purchases require instant cash liquidity and rental occupants or buyers.
  • Our local and regional county and state governments have increasingly serious revenue problems, and it is tough for these governments to cut costs as deeply as they need to…not just California with its record $42 billion deficit, but many of our counties and states are not reaching their previous revenue levels as new growth and development has screeched to a near halt.
  • How much can the Federal Government do to re-charge the economy and re-program the financial system? Not enough! Can we take an eight to ten trillion dollar national deficit and still perform as the strongest economy in the World? Probably not without an extraordinary technological revolution which will take at least another seven years to get fully energized. In a nation getting older with social security and Medicare “on the rocks”, can we dig deep down and generate another technological boom that will carry the US economy at a peak level of performance for another 50 to 75 years? Probably so, but we have to clean up the financial and psychological damage created by a generation of over spending and excesses, which will take another three to five years if the politicians “listen-up”. What’s the good news? The astute investors can still make strong returns and a lot of money in the interim, so long as they are careful, have a lot of liquidity or credit, and don’t need the banks!