Mortgage Banking

Making sense of commercial real estate finance.

Greed 15 : Fear 5

Posted by Jordan Crouch on October 5, 2007

I pulled this figure from an article entitled “Marking Sense of the Current Capital Markets Disarray” by Dr. Peter Linneman, the Chief Economist for NAI Global. You can read the whole article here. I’ve summarized it below.

There are two fundamental problems with the current credit markets: 1) most assets are long-term in nature, while most available capital is short-term and 2) the eternal struggle between fear and greed. He also attributes the Fed lowering and then later raising interest rates as a determining factor.

In the past 20 years, this type of “crisis” has happened 5 times: 1987 stock market crash, the S&L debacle, the 1998 Russian ruble crisis, 9/11 terrorist attack and now, hence the title of this post. Dr. Linneman suggests it takes roughly 18 months for pricing to return to normal, including this one.
Overall, it will be alright. The economy is strong, job growth is solid and most people rarely tap capital markets. The housing industry is hurting but should be, as he points out, there was a massive over-building of homes. He expects the later half of 2008 to see the same level of transactions at only slightly higher cap rates (40-60 bps).

Favorite Quotes from the Article
“It’s a horrible time to have to borrow or sell.”

“Society’s real sub-prime loss is that capital that built these properties could have been used for something more productive. “(good point!)

And my favorite….”As for the idiots who lent (often without down payments or documents) to the idiots who bought speculative homes, they deserve to lose.”

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