Sunday, November 15, 2009

2010 Preview

I've spent a good portion of my weekend reading through the "Emerging Trends In Real Estate 2010," which is a 90 page analytical forecast presented by PriceWaterhouseCoopers and The Urban Land Institute.

To summarize some of the main themes, 2010 will be the year when some of the buying opportunities first begin to appear in the multi-family, hotel, and industrial markets. Office and retail have a long way to go.

Over the past 12 months banks and property owners have been in a state of shock. By year end commercial real estate prices will have fallen 30-40% from peak levels and, based on this forecast, will have fallen 40-50% by late 2010 and early 2011.

We do not see these prices reflected across the board yet because there are no transactions taking place. Banks do not want the properties back on their books, and property owners do not want to sell. Both sides do not want to recognize the true market values and their losses. We are in a world called "extend and pretend."

This world can continue on for only so long, and industry experts believe we will see the true blood and gore begin to emerge by the end of next year.

This will come both in the form of property owners giving up and declaring bankruptcy (if possible) or banks and the government finally beginning to unload their enormous portfolio of real estate loans they have acquired over the past 18 months through the bail out process.

The FDIC and the Federal Reserve will be looking to unload their properties. Many people, including myself, believe that process will emerge in the form of the Resolution Trust Corporation Part 2. The original RTC was created in the early 90's during the previous savings and loan crisis.

Banks were scooped up during the government program as they failed and their properties were unloaded to investors at pennies on the dollar.

Before this happened again, due to the growth in size of the real estate problem, the government had to make sure that their friends at the big banks such as Bank of America, J.P. Morgan, and Goldman Sacs were protected.

Now that these large insolvent zombie banks have been nationalized and are cozy in the arms of the government collecting huge tax payer bonuses, the real estate can be sold into the market for a fraction of its price and the losses will be paid for by the tax payers.

It is a horrifying process to watch as the American people have absolutely no understanding of what is happening while they are pillaged by the government.

As the real estate market works toward finding its bottom the dollar continues its long term devaluation and no action to stop its fall is even being discussed.

Interest rates, we are told, will be kept at 0% indefinitely. We will run larger, and larger, and larger deficits that will continue to be financed with printed dollars.

Central Banks around the world are continuing to move away from the dollar and they have found a new friend, well I should say, an old friend.

First the first time since the early 1980's Central Banks have openly announced that they will become net buyers of gold after being net sellers for close to 30 years.

This shift is not small, subtle, or indiscreet. It is MASSIVE. The importance of this is felt mostly from entities that have been able to suppress gold at their will in the short term by shorting futures contracts on the COMEX. This tactic over the past 10 years has both kept gold's rise slow and steady and allowed them to profit considerably as they moved the market lower and took profits.

Now this tactic has become far more dangerous. If you take a large short position and a Central Bank announces the purchase of $7 billion in gold, as happened two weeks ago with India, then your short position will be run over by a train.

This will continue to happen as purchases are announced by China, India, Brazil and the other developing nations that shape the future world we are headed toward.

This takes care of the demand side of the equation but what about supply? As gold prices move toward record levels week after week we must be in a period of tremendous new supply entering the market, right?

Wrong.

Yesterday the President of the largest gold mining and production company, Barrick Gold, noted that "after ten years of declining production it is time to recognize that the world has seen the peak in gold production."

We are in the early stages of the spectacular finish to the golden bull. Pension funds, hedge funds, governments, and now even central banks are entering the market. They are entering the market at a time when production has peaked and will begin to decline.

2010 will be the year when the true blood and gore emerge from the real estate market. On the opposite end of the spectrum the precious metals will enter the spotlight, and the silver market could become the greatest mania in world history as investors rush in and realize there is absolutely no supply available.

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