When Timmy Speaks, Do People Listen?

Friday, October 30, 2009
Posted in category Economics

There is no commercial real estate crisis on the horizon.

U.S. Treasury Secretary Timothy Geithner said commercial real estate woes won’t set off a new banking crisis, in remarks to the Economic Club of Chicago.

“I don’t think so,” Geithner said, when asked whether commercial real estate could set off another banking meltdown. “That’s a problem the economy can manage through even though it’s going to be still exceptionally difficult.”

Driving through the Detroit suburbs provides a sobering look at the commercial real estate crisis that’s been with us for some time. The best way to describe it is, “(almost) everything is vacant.” Professional buildings, strip malls, indoor malls, free-standing large buildings – all kinds of empty shells. Timmy doesn’t read the news.

From last month’s Atlanta Journal-Constitution:

The same conditions that caused the residential bubble — including the Fed’s easy credit, lax lending standards and booming mortgage-backed securities underwriting on Wall Street — also drove commercial real estate overvaluation.

The 18 percent price decline in second quarter was the largest quarterly drop in the 25 years since MIT first published the commercial real estate price index. Most commercial properties bought or refinanced in the last five years are now upside down on their loans — with current property prices having fallen below the finance or purchase price. Real Capital Analytics reports that owners have lost their entire down payments on about $1.3 trillion worth of property.

Nearly half of all the commercial real estate mortgage loans in the U.S. are coming due within the next five years. Deutsche Bank believes that 65 percent or more of these loans will fail to qualify for refinancing.

Here’s some oldies but goodies from the TreasurySpeak archives:

- Hank Paulson saying there is no recession.

- Hank Paulson saying that we had hit bottom on the housing bust (2.5 years ago)

- Hank Paulson consistently telling the media that the subprime crisis was contained.

Fundamental factors–including solid growth in incomes and relatively low mortgage rates–should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.

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8 Responses to When Timmy Speaks, Do People Listen?

  1. clark says:

    October 30th, 2009 at 8:31 am

    For more of this look at the idiots in the mainstream media who get/got it wrong, and who got/gets it right: “The first look at the HBB review of the media and reporting on the housing bubble starts with International magazines, news web sites and newspapers.”:

    The Bad: Barbara Cocoran. “I think it’s a much scarier world that we live in. When kids are scared, where do they run? They run home. People are staying home more..it’s really reassuring for people to know they own the walls around them. People have also become more distrustful. People don’t trust the government, they don’t trust Corporate America, they don’t trust the stock market. They trust their house.”

    “I think the bubble theory is nothing more than an intellectual expression of people’s typical worry that good times can’t last forever.”

    The Best:
    1. The Economist – “The ratio of prices to rents is a sort of price/earnings ratio for the housing market…To bring the ratio of prices to rents back to equilibrium, either rents must rise sharply or prices must fall.”


    The ratio of prices to rents works the same in commercial real estate as it does with residential, or are we, “working off of a totally new economic model than any of us have ever experienced in the past.”
    When a person, “trusts” their house, that’s an emotional based person, that might be the kind of person who still listens to Timmy G. looking for hope. I haven’t read of or heard the mention of the word hope since soon after the election, I wonder why that is?

  2. Michael says:

    October 31st, 2009 at 10:33 am

    Hank Paulson should be serving time. Same with Alan Greenspan, Ben Bernanke, and Tim Geithner.

    I love the Paulson quotes. There was a post somewhere on the web that compared Bernanke’s and Paulson’s quotes to their Roosevelt-era (Great Depression) counterparts. They were nearly identical (at least in sentiment)!

    Here’s my three step solution: 1. End the FED. 2. Destroy legal tender laws. 3. Ban fractional reserve lending.

  3. Jeannie Queenie says:

    October 31st, 2009 at 10:59 am

    Clark, I don’t think that by ‘trusting’ one’s house, the writer meant the same thing as trusting a person. My take on it is that if one has paid off one’s house it is a comfort to know that your roof is YOURS, and that no one can it from you, barring you refusing to pay real estate taxes. But then, seeing that each day brings more bizarre news, who knows, perhaps one’s home is no longer a safe, sure investment.. Maybe some whackjob czar will find ways to take our homes away too. For sure, to trust any stock market now is no different than going to Foxwoods or any casino. As for saying a person who ‘trusts’ their house as being emotional, I view them as being very rational for they have put two and two together and deduced the obvious…we all have to live in an abode..do you want to rent from someone or own your own home. As one who rented for years when I moved east 20 years ago, I could write a book on all my nightmare stories of bad news landlords. I vowed I would never ever rent again..and further vowed I would pay cash for my home which I did. It wasn’t easy, it took years of saving and discipline, but I made it. I don’t see how you can view thoughtful planning and execution of such a goal as emotional, as it’s anything but! The only emotional jerks were the ones who actually believed that prices would go up forever, thus allowing them to overextend in their borrowing. Thanks to those emoters, we all have dropping values now.

  4. Jeannie Queenie says:

    October 31st, 2009 at 11:45 am

    So Timmy says, ‘no problem with commercial real estate”…yeh, and my grandmother rides a Harley too bud”. (grandma’s been gone 20 yrs). A Mr. Daniel Tishman, owner of one of the oldest construction firms in the country, Tishman Construction, about a month ago told CNBC that commercial real estate is the second shoe to drop. He continues on with “We’re getting through the single housing real estate market OK but the numbers involved in commercial real estate in all sectors are staggering,” Tishman said. “Trillions of dollars are involved in commercial loans. The roll over of those loans in the next 5-7 years is going to happen and the money just isn’t there for refinancing.” He adds that “”The TALF (Trouble Asset Loan Facility) program is about to end and it needs to be extended,” meaning he is looking for gov help!With much of commercial being under water, banks are reluctant to foreclose for they don’t want to to write off the losses.
    Then sponsors aware they’ve dialed into big losses of the big commercial projects – condo units, shopping centers, warehouses, office space, manufacturing facilities, hotels, etc., are no longer maintaining their buildings. When eventually banks foreclose, they are then stuck with buildings needing bigtime expensive repairs,or write them off.So don’t believe a word that sweet talking TImmy is feeding us…there is a virtual tsunami of multi trillions in commercial real estate heading soon to a neighborhood near you. It won’t be pretty when these stores start closing and the looters and the squatters pluck their sorry butts in the broken down big buildings. To see Tishman on a CNBC video/6 minutes long, ck the following url–

  5. clark says:

    November 1st, 2009 at 1:36 am

    Barbara Cocoran the mainstream media loving realtywhore spokesperson said the words which ended with, “They trust their house.” and I’m sure she meant it the way it comes across, and Not the paid off kind of house, the kind a person is up to their eyeballs in debt for and also trusting that it was a good, “investment” that would just keep growing and growing in value. That is not rational, that is emotional, because, “it’s different this time.” I’m not sure if even those who paid cash for their houses were rational, many bought at the top of the market, and they bought a now-depreciating liability with unlimited upside to costs from money hungry tax entities. We have dropping values because the future pool of buyers is exhausted from the false signal of easy money provided by the Fed combined with over building, among other macroeconomic reasons. There are lots of good landlords out there and I could write a book about the number of times I didn’t have to pay for unexpected home repairs and deal with everything involved with that. So-called, “home-ownership” means either renting from a bank and/or renting from Uncle Sam.

    “It won’t be pretty when these stores start closing and the looters and the squatters pluck their sorry butts in the broken down big buildings.” and the renters with mobility will relocate to where there may be jobs and more security while the homeowners are strapped into the area with the homeowers unable to escape the effects. Unless you’ve got an income producing property such as a farm (even then, farmers may suffer) a house is a liability, perhaps an unbearable one if hyperinflation takes off and the currency collapses while the taxes increase and your income remains flat, goes down, or doesn’t keep up with costs and the effects from inflation… sort of like commercial real estate?

  6. clark says:

    November 1st, 2009 at 2:08 am

    Some funny shi.. stuff from HBB:

    “The Obama administration endorsed plans to extend an $8,000 tax credit for first-time homebuyers, saying it is helping stabilize the nation’s housing market. The tax break has ‘brought new families into the housing market and contributed to three consecutive months of rising home prices,’ Treasury Secretary Timothy Geithner said.”

    “Lawmakers also said they won’t extend the break beyond the new April 30 deadline. ‘The American people should understand this — and the affected industries — this is the last extension,’ said Senator Johnny Isakson, a Georgia Republican. ‘Tax credits like this only work by creating the sense of urgency to take advantage of them.’”

    “But as prices slid starting in early 2006, condos became less attractive and harder to rent out — now it’s often cheaper to buy or rent a house, Timmerman said.”

    “The local real estate market has lately been hampered by the high unemployment rate and a new wave of ‘option ARMs’ or adjustable rate mortgages, Bruce said. While the values of homes were rising, borrowers were happy with option ARMs, Bruce said. However, many of those loans have now reached a five-year ‘reset’ period in which loan amounts will reflect the true interest amount.”

    “‘With the clarity of hindsight, there’s no way they can make those payments,’ Bruce said of home loan borrowers with option ARMs.”


    And what’s all that mean for commercial real estate and consumer purchases? Not a pretty picture, it’s a downward sloping curve changed only by going on the very opposite path the nation is on now. The economy is spiraling down the same way it went up.

  7. John Q. Galt says:

    November 1st, 2009 at 5:54 am

    “His name is Henry Paulson. His name is Henry Paulson. His name is Henry Paulson.”

    Sorry, couldn’t resist.

  8. Jeannie Queenie says:

    November 1st, 2009 at 2:24 pm

    Clark, I stand by my original statement that it feels good to have one’s home paid off, and further it is a rational move for a senior who wants to stay in an area. The largest outlay for most folks is that damned mortgage payment or rent which can be even more devastating. As a retiree, I am not concerned about jobs in the area. And as I said before, as a woman, I would never in a million years rent again. If you are a single woman, lots of scary stuff happens with landlords, at least that was my experience on the east coast. Further, renting is no panacea when the landlord can dictate the amount of rent and whether it includes utilities, most of all heat which often is not included. And then the obvious, rent money is money thrown down a hugh black pit never to be seen again. You are in essence paying for another guy’s taxes, insurance, and upkeep and often HIS utilities too, as I found out when living north of Boston in a seaside town. I couldn’t figure out why my electric was so high..and hired someone to check, and found out my landlord was piggybacking on my utes..a real bastard…and that was when he wasn’t in my unit looking through my personal belongings helping himself to a few stock certificates along the way…I could go on and on for he wasn’t the only one. My many experiences taught me that landlords can be a fairly slimy group. As for anyone who bought at the top of the market, when property values fall and one may want to move, you are basically making a LATERAL MOVE….meaning if you bought a decent home or condo, say at $200,000 and the value falls to 75,000, you can still get a similar deal of same quality at that same price of 75,000, all things being relative.
    ..so I never saw that as an argument to not pay cash when I bought 5 years ago…further, everyone loses value, not just you, the buyer/owner, so it isn’t like you are out there all alone. Michael, above in his comments, is right on the ticket with his three step solution. I do feel for those who have partaken of the $8,000 rebate for they have been tricked into buying when the market is only half way down. In a couple years when they find that they have lost half their value and are stuck with a large mortgage versus actual home value, we will see the next round of foreclosures…uncle sam is sort of a tricky dicky…or worse. I may not enjoy that I see values falling when I bought at a higher price, but then putting that money into the market would have seen a LOSS of at least 50%…so where is the guarantee in not paying cash? At least I do have something tangible…if I had kept it all in the market, most of it would have dried up by now..at least I HAVE A ROOF!

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