Dr. Anthony Downs of the Brookings Institute explained the role of real estate in our financial crisis this morning at a joint meeting of ULI MN and NAIOP MN. This is the topic of his most recent book (he has written 25 books and over 550 articles). We got into this mess because a gigantic flow of worldwide capital came to the United States over the last decade. The bursting of the dotcom bubble pushed investors out of the stock market and into the "safe" realm of real estate. Ultimately, there was more money than quality real estate investment opportunities. The overinflated real estate prices, coupled with low regulation and derivatives have led to a mess that will not be easily resolved.
Dr. Downs believes unemployment is going to hit 12% and new housing starts will be at their lowest level since 1945 (2009 housing starts will only be 30% of what they were in 2005). The home foreclosure situation will continue, but will stabilize. The next tidal wave will come with commercial real estate holders defaulting on their loans.
Dr. Downs quoted Arthur Schlesinger's assertion that America falls into 15 to 20 year cycles of swinging between extreme regulation and deregulation. Expect the U.S. to move hard from the deregulation started by Reagan to our regulation phase now started by Obama.
When will we hit bottom? Here are the odds Dr. Downs gives on our recovery:
- 15% chance the recovery starts in 2009
- 65% chance the recovery will start in 2010
- 8% chance the recovery will start towards the end of 2010, but we'll face a drop in the value of the dollar
- 12% chance we'll recover by 2012, but we'll experience another recessionary dip before then
What about long term trends?
- Globalization has stalled, but will come back when the economy recovers.
- New houses will be smaller.
- High urban density will increase.
- Suburban sprawl will continue because of the entrenched lobbyists that push policies that end up promoting it.
- Home equity loans will go away, forcing Americans to live more within their means.
- Americans will accept a lower living standard to avoid excessive debt.
I recently read an article in Rolling Stone about how Goldman Sachs has played a large role in several of the last major crashes. Very interesting and at the same time unnerving. I can send you a link if you would like to read it.