Below is a dial in number and password for a tape recorded conference call with the Head of Economics at The Wharton School of Business, Dr. Linneman. I’ve heard Dr. Linneman speak twice in person and he is extremely we versed on the global economies. It is certainly worth your time to spend 15-20 minutes of your day listening to this recording, which will surely enlighten you on where we are today, how we arrived here and how long it should take for the sub-prime debacle to correct itself before we can return to more of a normalized market.
To access the recording, please call at any time:
Playback Dial-in: (641) 715-3439
Key Highlights of the Call
Two Main Issues:
- Investors have matched short-term capital against long term assets;
- Markets face the perennial battle of fear vs. greed, and while greed wins in the long term, fear is winning today.
- Poor underwriting, rating agencies failed;
- Only 30% of homebuyers have not locked in long. The losers are the lenders/investors, not the homebuyers;
- The losses are "only $90 billion" a big number but not in percentage terms;
- Margin calls have forced the exaggerated impact in the market.
Historical Perspective: This has happened five times in the past 20 years.
- 1987 - Tax law change - in a strong economy - 18-24 months to recover;
- 1991 - S&L crisis - in a recession - 12-18 months to recover (real estate took longer);
- 1998 - Russian Ruble - in a strong economy - 18-24 months to recover;
- 2001 - 9/11 - in a slowdown - 18-24 months to recover;
- 2007 - Sub-prime - in a strong economy - expect 18-24 months to normalize.
Dr. Linneman anticipates continued economic growth but wider debt spreads and tighter credit standards for 18-24 months. Expect London and NYC to be negatively impacted by rental demand as hedge funds and other financial services companies tighten.
- Keeping interest rates too low for too long in 2003-2004 added artificial fuel to the economy.
- Now rates have been kept too high for too long.
- With inflation at 2.0% - 2.25%, rates should be 4.0% - 4.5%;
- Open market activity is only a band-aid. The Fed needs to ease rates.
- It will take 12-18 months to digest the 400,000-500,000 surplus of homes built.
Real Estate Pricing:
- The REIT market has re-priced; the private market has not;
- Cap rates are about 50 basis points too low. With new credit spreads, cap rates will need to move up about 80 basis points;
- Debt exists but lenders require higher coverage and lower loan-to-value (70-75%);
- Pricing is more reflective of asset "quality" than asset "classes." Regardless of property types, people will now pay more for quality.
- Expect credit to be overpriced for 12-18 months, then normalize.