Are we Living in the Bizarro World?

The government has seized the opportunity of not letting a good crisis go to waste.

They have forced banks to take TARP money, against their will in some cases, and when those banks want to pay it back they are discouraged from doing so. Why? The government wants to control the banking industry and dictate what bankers can earn. You know that the TARP money “lent” to the auto industry will likely be converted to common equity in order to provide additional control. Even without common equity they had enough influence to fire the chairman of GM.  Money is being printed and spent at unprecedented levels because we are told that, “The world will end if we don’t do this”.

All of this spending could balloon the deficit to the point where our interest payments could approach $500 billion per year. That would be just the interest and that is more than any deficit we have ever had.

For more than 50 years, democratic capitalism constructed its modern framework against the backdrop of its death match with totalitarian communism. In the last 20 years, the American model of capitalism was largely unchallenged by ideological alternatives and became increasingly dominant around the world. It drifted toward what conservatives viewed as a more pure form of economic liberty and what liberals came to view as misguided free-market fundamentalism.

Today, we hear a lot of ideas coming out of Washington regarding the need to diminish the consumerism that has been the backbone of economic growth in the United States. They say we should move away from consumerism and reorient towards saving and investing. They say wealth should be redistributed and we should make the rest of the world less dependent on the US market for their prosperity.

They argue that an activist government is an acceptable and necessary partner for a stable, market based economy. Smart political advisors describe the philosophy in terms of pragmatism rather than ideology.

Transparently, the government is trying to have much easier access to manipulating the private market economy. This philosophy and approach is not limited to the federal government as state and local governments have been following suit.

In New York, our multi-family housing market is subject to a rent regulation system which is advantageous for tenants at the expense of the property owner.  Rent controlled and rent stabilized housing is misallocated, as financial need is not part of the equation. The laws provide maximum benefits to those who have been in place for a long time reegarless of their financial status and need. This results in a system that makes tenants resistant to moving which constrains the supply of available units and puts upward pressure on the average rent a New Yorker pays.

Recently, the New York State Assembly passed a package of bills to strengthen the laws to an even greater extent in the tenants’ favor. Even before the present package was passed, over the long term, allowable rent increases did not keep pace with the increases in operating expenses. If the Senate passes these bills in June, making ends meet will be even more difficult for owners. (go to www.masseyknakal.com and check the “Reel” for a commentary piece I wrote on April 20th which goes into greater detail about  the potential impact of the pending bills).

Moreover, this past week, Housing Preservation and Development Commissioner, Rafael Cestero, announced that he is concerned about how much debt property owners place on their properties. He claims he has spoken to officials in Washington “to discuss how to make sure future property sales are sound” and that they are “looking at ways in which we could potentially work with the federal government to bring resources to bear that will help us ensure that ownership – when it needs to be transferred – is transferred to responsible owners.”

Is “property ownership” becoming an oxymoron?

If Jane owns a 50 unit property and wants to sell it to Joe, will Jane have to get approval from the government to sell the property? Will it be rubber stamped if the price is low enough? Will the sale be disallowed if the price is too high or if the amount of the mortgage exceeds some limit? What will Joe have to do to prove that he is “responsible”?

The argument is that the quality of life for the tenants is jeopardized if debt service eats up too much cash flow to allow the owner to make improvements. Oddly enough, most of the owners on the “slumlords” list published each year are long time owners with little or no debt on their properties. Additionally, more capital improvement money is poured into properties in the first two years of new ownership than at any other time.

George Orwell would love our Bizarro world……Remember, Big Brother is watching!

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21 Responses to “Are we Living in the Bizarro World?”


  1. 1 JM April 30, 2009 at 11:11 am

    At this rate, builings in the other boros will decrease to 4-5XRR. It will probably take 5-8 years to get there but it will happen. Slow deflation.

  2. 2 rknakal April 30, 2009 at 11:25 am

    Hi JM, Thanks for your response. Thus far, the multifamily sector has been holding up surprisingly well although it currently seems to have a big bullseye on its back. If the market takes 5-8 years for a recovery to occur, we are all in for a very rough ride. We believe values will bottom out sometime in the first half of 2010 at about the same time that unemployment will peak. That price level will then likely bounce along the bottom for 2-3 years as we go through a deleveraging process that will occur over that period as loan maturities kick in. We are hopeful that modest growth will occur at that point. Sam Zell seems to concur as, in an interview yesterday, his new catchphrase is “Stay clean until 2013”.

  3. 3 ibm1000 May 1, 2009 at 6:01 am

    Hi Bob,
    I enjoyed reading your excellent and informative work.
    I wish if you have time to visit my site and tell me your opinion.
    Thanks and good luck.
    http://allinone5.blogspot.com

  4. 4 bobgreenfest May 5, 2009 at 3:02 pm

    Bob – nice article, a bit of humor thrown in with way too much reality. Can’t agree that it’s a Bizarro world however, as Bizarro typically referred to a backwards world. These times are sideways crazy, mixed in with backwards, and shaken too, that Bizarro doesn’t adequately explain the strangeness.

  5. 5 Ron Winter May 5, 2009 at 4:14 pm

    How in just 100 plus days in office has our govt gone from the ideal of “by the people and for the people” to only the govt knows how to do everything and hence they need to control everything. We have some very sick people with egos we can’t afford in Wash DC. This “Change” is not for me. I own my own business, and own property and do not need the govt. to help . How come there are so many that want big govt to take care of them so they don’t have to work or do anything. Those are the voters the politicians are using to take over all free enterprise. It is time for a revolt!!!!

  6. 6 Jim Ciotti May 5, 2009 at 4:28 pm

    Hey Bob:
    Thanks for the piece on Fed Intervention. It’s a Hollywood movie… Institutions (Banks, etc.) and Government agencies spitting at each other, free and open market Capitalism being uprooted and replaced with Socialism, excuse me, nationalization of our Banks for their protection. Please! Where were all the Bankers Residential Credit Underwriting Matrisis’ when the Sub Prime and Alt A hit… out the window! Now, we are going to offer you wondeful fellows in the CRE Space a slice of a 5 year TALF loan.
    Really!!!! You think all our founding and brilliant CRE predecessors are turning over in their graves at the mess thats being created via Fed intervention. The Capital Markets are, have been and will always be the efficient answer to these irregularities in the CRE & Financial Markets. Rent Control, Stays of foreclosure, legal munipulation of MAC’s in agreements, where does it all lead? “Vast Opportunities” in the market for those who are positioned to Capitalize…. As the World turns….

    Thanks for providing some sanity in a market gone mad….

    Jim

  7. 7 Clinton W. Blume, Jr. May 6, 2009 at 8:47 am

    Sir:
    Thank you for speaking out in so candid a manner.
    What will surely ‘bury’ our political and economic system is not the derisive scolds from the “LEFT” but frightened victims who never stand up to defend themselves.
    It is not just ‘bizarre’; it is prophetic, and very, very dangerous.
    cwb

  8. 8 rknakal May 6, 2009 at 10:02 am

    Hi ibm1000, Thanks for your post. i will visit your site.

  9. 9 rknakal May 6, 2009 at 10:04 am

    Hi Bobgreenfest, Thanks for your post. Whatever adjective you use, things are heading in a scary direction for anyone who is self motivated in any way at all.

  10. 10 rknakal May 6, 2009 at 10:10 am

    Hi Ron, I can sympathize with your position. As a business owner, you will be called on to pay significantly increase taxes on a federal, state and local level to bridge the massive deficits all municipalities are running. Government spending cuts are nowhere in sight so the burden will be placed on you. Many municipalities are using stimulus money to fill in budget gaps and without spending cuts, the deficits will be there when the stimulus money ends.

  11. 11 rknakal May 7, 2009 at 6:25 am

    Hi Jim, thanks for your comments. It appears that more and more people are feeling the way you do every day. I receive many comments directly to my email which are so loaded with profanity that I would have to completely rewrite them in order to have them posted on this blog. If this sentiment persists, the midterm elections and the campaigns leading up to them should prove to be very interesting.

  12. 12 rknakal May 7, 2009 at 6:30 am

    Hi CWB, Thank you for your post. Dangerous indeed! It will be interesting to see how long this this approach is taken by our elected officials.

  13. 13 EBornet May 12, 2009 at 12:44 pm

    For years the government, while controlling what you can charge for the rent, has not controlled the costs of fuel, insurance, mortgage interest, wages or any of the other expenses involved in operating property. As a result, more properties default in the payment of taxes and are subject to foreclosure.

    Why am I not surprised that the government is looking for to tell you to whom and for how much you can sell your property.

  14. 14 chris hauser May 12, 2009 at 6:54 pm

    well, at some point, if one can’t make a profit, one can’t pay taxes. that about sums it up, don’t it?

    gonna be real work for the next few years. salad days is over, yessiree.

  15. 15 rknakal May 12, 2009 at 8:43 pm

    Hi EBornet, Thank you for your post. This issue is amazing to me as it appears to be to you. When will the insanity end?

  16. 16 rknakal May 12, 2009 at 8:45 pm

    Hi Chris, thanks for your post. If the pending rent bills pass and taxes and other expenses continue to increase, the Bronx (and not only the Bronx) will be burning again.

  17. 17 EBornet May 13, 2009 at 2:13 pm

    If the government imposed the same restrictions on other industries as it does on NYC real estate, NYC would be a ghost town. Can you imagine telling an investor what they are reguired to sell their IBM stock for or how much a store owner can charge for a container of milk?

    The government has used the real estate indutry as an extension of the Dept. of Social Services for years. The difference being that there is no income limitation for rent regulation as there is for DSS benefits.

  18. 18 rknakal May 14, 2009 at 6:54 am

    Hi EBornet, Thanks for your post. Rent regulation is nothing more than a welfare system with the responsibility for providing the entitlement falling on the shoulders of the private sector. And you are correct that this welfare system really does not have any income test. I know several people who make over $1 million per year that pay less than $1,000 per month for 2 and 3 bedroom apartments. How does that make any sense? I am a supporter of the fact that the City needs more affordable housing but private property should not be taken for this purpose. There are several other alternatives that could be used.

  19. 19 DayofReckoning June 14, 2009 at 1:23 pm

    There is nothing Bizarre or Bizarro about Crushing Debt. The Piper is here, and he wants his money. Now pay him.

  20. 20 rknakal June 14, 2009 at 2:55 pm

    Hi Day-, thanks for your post. The point is that Crushing Debt is exactly that, Crushing. The government needs to control spending, something politicians on both sides of the aisle seem incapable of.


  1. 1 » Sam Zell at Milken Institute Global Conference: CRE, CRE Finance, etc. Redfish Emerging Markets.com: Helping Good Investors Make Better Decisions Trackback on April 30, 2009 at 12:14 pm

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