In the Jan-Feb 2010 issue of The Atlantic, Megan McArdle writes Capitalist Fools in which she describes some of the background to the looming financial crisis in commercial real estate.
After some description, she concludes,
One of the most persistent narratives of the recent crisis portrays a nation of unsophisticated home buyers led astray by greedy bankers. Supposedly those bankers were willing to write risky loans because they intended to pass them on to some unwary investor. But this explanation falters in the face of a legion of failing commercial deals. Prospective landlords had all the expertise they should have needed to put a fair price on properties—and the majority of lenders who were originating loans for their own portfolios had ample incentive to perform careful due diligence.
The best explanation for the calamity that has overtaken us may simply be that cheap money makes us all stupid. The massive inflows of international capital, which Ben Bernanke has called the “global savings glut,” poured into our loan markets, driving interest rates lower—and, since most real estate is purchased with borrowed funds, pushing up the price of property in both the commercial and residential sectors. Rising prices, in turn, disguised any potential problems with the borrowers, because if they ran into cash-flow problems, they could always refinance, or sell. Everyone was getting bad signals from the market, and outlandish purchases looked almost rational.
See also in the 25 January 2010 Wall Street Journal Online, Tishman Venture Gives Up Stuyvesant Project: High-Profile Purchase of Manhattan Complex Collapses Under Debt Mountain.
The Tishman venture’s acquisition of Stuyvesant Town was controversial in New York. The Stuyvesant Town complex was developed by MetLife for returning World War II veterans and remained a middle-class haven even as rents in other parts of the city soared. Tishman’s plans were to raise the rents for hundreds of the units to market rates.
But the strategy backfired because of a slowing New York economy, a heavy debt load and a court ruling hindering the owners’ ability to convert rent-controlled units to market rentals. In January, the property depleted what was left in reserve funds and defaulted on its first mortgage.
-Richard H
How could this be? Isn’t capitalism the path to prosperity as in my previous post. 🙂
Certainly we know how to spend our money better than the government does.
You know this argument is coming when the economy bounces back and it is time to pay off what we borrowed for the stimulus.