NYHETER

Two Main Issues:

• Investors have matched short-term capital against long term assets;
• Markets face the perennial battle of fear vs. greed, and while greed wins in the long term, fear is winning today.

• Poor underwriting, rating agencies failed;
• Only 30% of homebuyers have not locked in long. The losers are the lenders/investors, not the homebuyers;
• The losses are “only $90 billion” a big number but not in percentage terms;
• Margin calls have forced the exaggerated impact in the market.

Historical Perspective : This has happened five times in the past 20 years.

• 1987 – Tax law change in a strong economy – 18-24 months to recover;
• 1991 – S&L crisis – in a recession – 12-18 months to recover (real estate took longer);
• 1998 – Russian Ruble – Strong Economy – 18-24 months to recover;
• 2001 – 9/11 – in a slowdown – 18-24 months to recover;
• 2007 – sub-prime – strong economy – expect 18-24 months to normalize.

Dr. Linneman anticipates continued economic growth but wider debt spreads and tighter credit standards for 18-24 months. Expect London and NYC to be negatively impacted by rental demand as hedge funds and other financial services companies tighten.

• Keeping interest rates too low for too long in 2003-2004 added artificial fuel to the economy. Now rates have been kept too high for too long. With inflation at 2.0% - 2.25%, rates should be 4.0% – 4.5%;
• Open market activity is only a band-aid. The Fed needs to ease rates.

Housing:

• It will take 12-18 months to digest the 400,000-500,000 surplus of homes built.
• The REIT market has re-priced; the private market has not;
• Cap rates about 50 basis points too low. With new credit spreads cap rates will need to move up about 80 basis points;
• Debt exists but lenders require higher coverage and lower loan-to-value (70-75%);
• Expect credit to be overpriced for 12-18 months, then normalize.