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The Capital Markets Disarray The credit crunch triggered by egregiously poor sub-prime residential underwriting in 2005-2006 is the fifth time in the last twenty years when fear is winning over greed in the capital markets. The mismatch of long-term assets and short-term investment capital, combined with widening credit spreads across all debt instruments, is forcing margin calls, which further exacerbate market fears of declining asset values. The good news is that the current capital market crisis will not spill over to the broader economy-namely job and corporate profits of non-financial firms. As with the four previous instances of capital market crisis triggers-the 1987 stock market crash, the savings and loan debacle of the early 1990s, the 1998 Russian ruble crisis, and the 9/11 2001 terrorist attack-this cycle will be broken when greed re-emerges over fear. When this occurs, investors will believe that asset values are no longer in jeopardy and are in fact a "steal." Count on greed to be back on the scene sooner than you think.
Anatomy of the Housing Market Boom and Correction The housing boom of 2002 to 2006 was caused by access to the easiest credit in fifty years and poor lending practices, rather than demographics and income. The financial incentives initially expanded home ownership, but also encouraged speculation, estimated to be 20 percent to 30 percent of all sales in the "hot" housing markets. A shift in the price of credit produced massive cancellations of these earlier sales, and a skyrocketing inventory of homes and condominiums. The capital markets seized-up as investors tried to unload leveraged positions in structured investment vehicles containing the riskiest of these mortgage loans. Buyers of these structured products didn't understand that valuations were based on the risks of a traditional housing cycle rather than on this speculative one. If the economy were to go into recession the current problems would become overwhelming and could very well create a deep and long downturn. Only a loan modification and forbearance plan might forestall a foreclosure onslaught by allowing a transition period to tighter and more sound lending practices.
The Wild Ride of Mortgage-Backed Securities This article traces the root cause of today's mortgage market meltdown. From the beginning of the mortgage securities industry in 1979, the author describes how the mortgage market evolved through the '80s, the '90s, right up to today's crisis. No matter the crisis-war, banking failure, or presidential impeachment-the mortgage securities market was supposed to always provide credit to the average American homeowner or would-be-homeowner. How could the mortgage industry, a close to trillion-dollar industry, suddenly collapse? Who is to blame for the ordinary Americans being denied a mortgage to buy into the American dream? How could $80 billion to $90 billion be wiped out virtually overnight? No one involved in the development of the mortgage securities market ever dreamed that credit would be shut down again. They were wrong.
Some Observations on Real Estate Entrepreneurship What makes a successful entrepreneur? Just as with great quarterbacks, entrepreneurs come in many different packages, with certain personality traits correlating with success. To start, entrepreneurs have a total passion for what they are doing. This article discusses additional traits and abilities that do not guarantee success, but which appear to be common to many successful entrepreneurs. Being an entrepreneur is not about a bank account, nor is it about prestige or headlines. It is about a life journey of enjoying what one is doing. It is about the opportunity to help people, whether they are customers, employees, partners, or capital providers. It is about developing long-term relationships. It is about retiring not when one can, but when one wants. This is what it means to be an entrepreneur.
Homeownership and Commercial Real Estate From an individual investor's portfolio allocation perspective, homeownership is not a substitute for commercial real estate investment. Homeownership refers to real estate one buys and uses as one's own residence. Commercial real estate includes real properties such as office, retail, industrial and multifamily rental buildings that generate only financial gains (or losses) for the investor. Homeownership is mostly a consumption good and second, an investment asset, whereas commercial real estate is purely investment-driven. Homeownership and commercial real estate are on opposite ends of the income return continuum, with commercial real estate having a positive cash flow and homeownership having a negative carry. This normally leads to a much higher total return for commercial real estate. The demand drivers and supply cycles for homeownership and commercial real estate are mostly unrelated, resulting in only a modest return correlation. In contrast to homeownership, commercial real estate lends itself to the use of sophisticated investment strategies to capture value creation and enhance risk-adjusted returns, such as development forwards, mezzanine debt, private equity in operating entities and international investments.
The Suburban Archipelago America's future is often captured in two distinct visions-one of continued, expansive sprawl and the other of an enforced density brought on by demographic and environmental changes. A third view proposes that although we will continue to spread outward, the essence of the urban experience will go with it, accompanied by some modest increases in density. In this vision of an archipelago of villages, we will see significant improvements in the social and environmental sustainability without forcing people to live in the kind of dense, multi-story apartment blocs that the vast majority do not want. This vision is based largely on an ever-dispersing economy tied together by telecommunications and transportation improvements. It offers a new, attractive, workable and socially acceptable model for the future as the nation gains another 100 million people by 2050.
Garden City Suburbs The author urges today's town planners to reconnect to the grand, yet undervalued, 150-year-old tradition of the garden city suburb as he addresses the revitalization of declining inner-city neighborhoods, rather than concentrating on greenfield developments on the periphery. These comprehensively planned green residential districts were the product of developers and architects working to provide for both the material and the social needs of many classes of people. They provided both single-family and multi-family housing, sometimes within a city or sometimes a short distance away, but always transit-oriented. The garden city suburb tradition, deeply engaged in development economics, social issues, and civic reform, holds many lessons for reinventing cities in our time.
America's Favorite Buildings A recent survey of the American public's favorite buildings casts interesting light of the divergence between public and professional taste. The public unequivocally favors old buildings over new. Only two of the top twenty-five buildings were built after 1980, and only one out of five buildings on the whole list was built since 1980-and two-thirds of these are in the bottom half of the list. The four largest categories of commercial buildings are: high-rise office buildings (20) and hotels (20), followed by transportation facilities (13) and sports stadiums (nine). The list of public favorites is compared to a list compiled in 1991 by an architectural periodical based on its professional readership. Fifteen of the buildings on the architects' top twenty-five list do not even appear on the public's long list of 150 favorites. Conversely, fourteen of the buildings on the public's top twenty-five list do not appear on the architects' long list. The author concludes that the gap between professional and public taste should be of concern—to architects.
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