Prepare now for the recovery, but be patient
Spring is finally here, but CNBC and the rest continue to pummel us with negative news and hyped up sound bites on the economic crisis.
Well, all is not lost. We are in a correction and we knew it was coming. Consider that home prices increased 86 percent from 2000 to 2006 (up 64 percent, inflation-adjusted). Homes have traditionally been long-term assets. But somehow we got carried away, largely due to the flood of foreign capital with insatiable appetites for new American financializations. While the bundling of residential mortgages and then other pooled loans seemed to reduce risk for investors, things got out of hand and the computer models calculating risk profiles and what might happen with rising levels of defaults suggested that nothing could go wrong.
Now credit markets have tightened up significantly. There appears to be no one to refinance $180 billion to $400 billion of commercial mortgage-backed securities rolling over in the next 12 to 18 months. The commercial sector tends to lag the residential by 12 to 18 months, so there is expectation for softness. Local and regional banks still have money they want to lend, but not with the overly generous terms of 2006 and 2007. Landlords need solid tenants. Owner/users need strong business fundamentals. Alas, with all the chaos in the markets, the national and global economies and rising unemployment, it is hard to consider things as being solid.
President Obama needs to come out loud and clear to explain that his team has a plan, that the plan will work, that they have or will stabilize the equity, residential mortgage and commercial lending markets …. the stimulus spending will get traction and things will be OK.
If well thought out and well presented, it should be enough to calm the collective nerves and settle things down enough that we can all get back to business. That is not to say we should expect a quick bounce-back. This correction and de-leveraging will take time, but perhaps by this time next year things will be firing on all cylinders, and we will see positive economic growth.
However, it may take longer, so every business — service, manufacturing, sales and professionals – needs to contemplate a moderate recovery or a prolonged recovery. Conserve cash, focus on receivables, keep the lines of credit under control and work on sales.
While there has been much criticism of the “It’s a shame to waste a good recession” comment, in fact, it is an excellent time to revisit fundamentals, get back to basics, meet with customers, both old ones and new ones — and future ones! Use the current slower pace to get in front of those you should. Examine your business mix. Disengage from unprofitable accounts. Look for new opportunities.
In adversity, there is opportunity. There are so many factors influencing our economy, no one is sure exactly how this will play out. So be flexible in your thinking and focus on the opportunities that will be in front of you for the next five to 10 years.
One caution: For every benefit there is a cost. The tremendous stimulus spending may likely result in future inflation. We simply cannot print a trillion dollars and add $2 trillion or $3 trillion of debt without some inflation at some point. Look for fixed debt and build cash reserves/savings to be able to avail yourself of opportunities.
Recently, the woman next to me at the gym said, “Did you hear that? A $700,000 condo outside Miami Beach sold for $28,000!” I didn’t hear it, but it occurred to me there will be bargains and deals for those who are prepared. This is not to say that things will all be rosy. There is still a lot of pain and excess to squeeze out of the markets, but it may not take as long as some speculate, once we are convinced that we are on the right path and heading in the right direction.
William Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and a Fellow of the Royal Institution of Chartered Surveyors (FRICS). He can be reached at firstname.lastname@example.org.