Saturday, September 22, 2007

The "Grave Dancer" Speaks

In a recent Forbes article, real estate investor turned newspaper owner, Sam Zell, discusses the "confidence crunch" that the country is currently involved in with Peter Linneman from the Wharton School:

"We're not really in a 'credit crunch.' I think we're in a 'confidence crunch,'" said Zell, funder of the Samuel Zell and Robert Lurie Real Estate Center at Wharton. "I would argue the excess liquidity that existed eight weeks ago still exists today. It has a different risk premium on it, but the actual amount of liquidity has not changed."

Zell said the slump should come as no surprise: "Over the last three years, people were flippant. They bought anything they wanted and were proud that they didn't do due diligence. I think they have all been chagrined and are scared out of their minds."

Linneman noted that Zell is known by the nickname "the grave dancer." According to Zell, the term grew out of the headline of an article he wrote, describing his strategy of profiting from distressed real estate after the inevitable bursting of bubbles of investment enthusiasm. Zell said the article shows how he "was dancing on the skeletons of other people's mistakes."

Zell, however, also pointed out that the last sentence of the article reads: "He who dances closest to the graves, always has to be careful he doesn't fall in."

Real Estate correspondent, Diana Olick, from CNBC discusses the recent poll that 26% of US Homeowners fell that the value of their home has declined over the past year:

So why do 74% of American’s not get it? Look, I know I’m always whining on TV that all real estate is local, and we should be careful with these big national figures, because there are always exceptions in certain local markets. Seattle and Portland for example, are doing quite well, but even their price growth is slowing. When I look at the 20 largest cities in America, only five of them are in the positive year-over-year.

With all the trouble in the credit markets, continued adjustable-rate mortgage resets, and rising foreclosures, not to mention continued sky-high inventories, what exactly makes ¾ of Americans think they’re going to make big bucks on their homes this year??

Reuters reports that former Fed Chief Alan Greenspan spoke about the current US housing problems and feels that prices are due to fall further:

"So far, prices have dropped only slightly. But it was enough to cause alarm around the world," he said. "Prices are going to fall much lower yet."

"However, it is too early to answer the question about a recession. We simply don't know yet. It depends on how flexibly the economy can react," he said.

Greenspan said deregulation and the introduction of market economies in the former Communist bloc after the Berlin Wall fell in 1989 had caused a global boom and a worldwide reduction of interest rates, which both helped fuel the property bubble.

"There is no doubt about the fact that low interest rates for long-term government bonds have caused the real estate bubble in the United States," he said.

"The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure," he said.

"Nobody could do anything about it, neither us nor the European Central Bank. We were powerless," he said.

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