The capital markets continue to be jolted by the overall confusion about the direction of our economy. Everything from jobs and inflation to interest rates, oil prices and housing provides conflicting information to support both the bears and the bulls. The old saying, “If you put 10 economists in a room, you will get 10 different predictions,” is just as true today as it ever was. In fact, you may even get 100 different predictions in today’s environment.
Over the past few years, the capital markets have been a great source of new and creative financial products for real estate owners. Year after year, more products were introduced with increasingly aggressive terms, ultimately achieving some of the most relaxed financial underwriting.
For example, a year ago some lenders were providing 90 percent leverage, non-recourse construction loans. These loans were priced with all-in rates around 5 percent. There is no doubt that some of the capital market problems occurring today are partially a result of the overly aggressive loan structures of the past.
Consequently, many lenders are now pulling products off the market, including straight-forward loans for qualified clients in good markets that are conservatively underwritten. In essence, they are “throwing the baby out with the bathwater” as the capital markets begin to overcorrect by swinging in the opposite direction and, thus, creating tremendous illiquidity.
The overly aggressive lending market of the past few years, combined with the current concerns about the overall economy, has created a perfect storm. Our society perpetuates the sentiment that we are exposed to every day. In a strong economy, we buy the newest products and invest in the hottest stocks based on word-of-mouth and great advertising. When the economy slows, the average consumer does not analyze in detail the current economic situation, but instead acts on emotion and the sentiment of others. With that in mind, the following is an example of some of the recent news blurbs driving our current attitude about the economy:
- Thirty-three percent of U.S. top executives plan to cut payrolls in the coming months.
- [California] median home prices plunged 30 percent, the steepest decline for any month going back to 1988.
- Investment in U.S. commercial real estate fell 70 percent in the first quarter from a year earlier.
- In February 2007, 84 percent of stocks were above their 200-day line. Today, only 27 percent are above that mark.