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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: patron_anejo_por_favor who wrote (50747)	3/23/2006 12:00:51 AM
From: patron_anejo_por_favor	Read Replies (1) \| Respond to of 306849

...and a rather fascinating reply to Kunstler (note the comments about lenders shutting down commercial projects, it was exactly what McHugh said today in Safehaven!) Lessening this downturn depends entirely on preventing a cascade of economic catastrophes. The mainstay employer in america today is construction. Therein lies the most volatile and potentially greatest cause of a cascade. One main trouble spot will be preventative layoff's that have been so common since the late eighties. Here is the engine that will start a cascade. The next trouble spot will be when banks pull the plug on construction projects in the preconstruction stage. This will be a very early sign. Developers borrow in one form of non recourse financing or another if they wish to stay alive. Housing developers already face this . Jim's comments make this clear. Since housing developer inventories are high , new units will only saturate the market. I do not know the extent, it must be high given the market the last few years, but many subdivision projects themselves must be syndicated non recourse. The housing developer makes his money from a sales commission with the house and lot profit being syndicate profits that the developer is part of. It is a sine quae non that development of the land base is financed non recourse. This technique always arises late in a housing boom. Above all smart developers survive because they know recourse financing is a ticket to bankruptcy. Naturally, trade layoffs will be steep. Since much of the market is non union, these areas will suffer the greatest hit the fastest. Trade layoffs kill off the subcontractors very fast in a downturn. My own experience is in very large scale general contracting. Here, typically 80 % of the work is subbed out. The typical major metro market trade is dominated by around five major firms that control 80 % of the trade. These firms are typically closely held by traditional contracting families. Usually, very reactionary types. My own observation inrecent years is that the children of the family consume every pocket of the business . These firms have little leeway for a decline in jobs without facing insolvency. That said, they are very good at living with insolvency for long periods of time. They simply milk the thing to death rather than layoff kin infesting the place. It only takes one or two failed sub's to kill an entire project to a heavy loss. Today, few subs are bonded because the owners will not pay the bond. This is a vast subject I have much experience in helping to extricate the general. Now comes the heavy killer. Panicky banks eventually look for a way to shut off projects under way. I saw it happen in the early eighties and nineties. This will be the killer of the less well healed general and with it goes an awful lot of jobs. This time around the banks will really panic because they are mostly on the hook for construction loans for large scale projects. This stuff is not laid off to FNMA or the mortgage trusts. A big area here is health care , corporate structures and condo projects in large cities. Huge backlog underway here nationally. Everyone I know of has an all time high backlog of unexecuted work. Another sign is that owners of these large projects are experiencing or starting to experience slow pays by the owners. They haggle over everything till the project nearly falters to avoid another draw from the bank. This is an old story that is now accelerating. Another source of trouble is that slowing the project down eats into the general contractors budgeted "general conditions" so that as the project matures the project staff cost is eaten by the general. That is when the general slides if the GC is not astute enough to head the problem off as it arises. Most have lost the touch here. Laid off workers default on down the line. Given the figures cited in Jim's blog it is obvious that we are well into the protective jettisoning of inventory stage. With all those nearly new houses held by speculators going on the market all at once, pressure will build to make financing these sales as difficult as possible to aid the sales of developer inventory. One is a financing decision. The other is the same financing decision plus helping to save an ongoing customer and the trades already financed inventory. Who would you help first, your golf buddy or some schmo you have no connection too? Of course, FNMA steps in the picture here, but not for the Jumbo Market! The Jumbo's and Super Jumbo's is where the critical first panic dumpimg will make the greatest dent in resales. There is guy across the street and back in the woods who has a $700 grand house up for sale. My little house is $200 grand. I live in a 2000 Sq mile county of 30,000. Half live in the area of the county seat. There are at least 15,000 second homes and condos in the county. There is little or no market for these places in a panic mode. The mortgage servicers will be quite busy operating housing developments as the developers "give them up". This is just the start. This is what happened in the late eighties and early nineties. Of course, there are all those spec office buildings out there that have a few tenants with a lot of non built out space. They will be kaput too! All in all, we will have a trillion dollar failed cash flow problem, perhaps a lot more by the end of the year. Fixing it first requires establishing the nature of a complex problem and it's extent. Next would come retailing inventory liquidation with credit cards maxed out and minimum's increased. Posted by: Jerry Johnson \| March 19, 2006 at 05:56 PM