What Does This S&P Downgrade and Stuff Mean for the Dallas Real Estate Market? Another Nail in the RE Recovery Coffin?

Published August 15, 2011 by Candy Evans

 Another nail in the coffin of the struggling real estate recovery?

That’s Jonathan Miller and me in San Francisco at Real Estate Connect. I am glad we are friends because Jonathan is about the most quoted real estate consultant and expert these days, and one of the most knowledgeable appraisers I know. (I’ve given up on the PhD’d economists. Get me real people who work.) Money Magazine calls JM the “Best Online Real Estate Expert”; The New York Observer says he’s one of the 100 Most Powerful People in Real Estate; Inman News crowns him one of the top 25 most influential real estate bloggers in the U.S. and his blog, Matrix: Interpreting the real estate economy, was voted one of the top five U.S. real estate blogs. While I chatted with him in his New York office in June, Bloomberg, the Wall Street Journal and the New York Times called him within an hour. So when we got the news that Standard and Poors had downgraded the U.S. credit rating from Triple A to AA, the person I most wanted to call was Jonathan to learn. What the hec does this mean to housing?

Economic uncertainty, he told me, is the enemy of any housing market, especially given the existing weakness of the economy and the tightness of credit.  While no one really knows the extent of volatility in  the financial markets over the next few weeks caused by the S&P downgrade of US, the market may “pause”, placing additional downward pressure on  housing.  

Jonathan is aware of the relative strength of our Dallas market compared to most, but I don’t care if you live in Whisper, Montana — this kind of financial news affects EVERY market. Of course, we share the same view of Standard & Poors, the folks behind the Case Shiller report. Recall these are the idiots people who gave good ratings to worthless tranches of mortgages bundled together and sold off to investors who trusted them. I could not have said it better:

The irony of S&P’s decision to downgrade the US rating was their key role as enabler in the global credit boom and subsequent collapse that has caused widespread global economic weakness despite a $2 trillion dollar math error as well as their lack of liability for their past and future errors,” he said. 

And here’s the money:

“Rethinking of the power of rating agencies, their neutrality of compensation and accountability for their actions should be a first step in the repair of our financial system,” saidJonathan Miller, President/CEO, Miller Samuel.

So what can we expect? S&P knew the downgrade would slam the markets, which is why they reported it on a Friday. Miller thinks interest rates could rise, but the Fed has sworn to keep them low until 2013. Which he thinks is not so great. The real hurdle today is obtaining financing for a mortgage. Banks are not lending out that money they get from the feds. As Inwood Bank’s Gary Tipton told me: it’s like they are telling you to cook dinner but do it without any appliances. Banks don’t want to lend on low-return mortgages and they are requiring borrowers to go through quadruple hoops. Self-employed? Fohget about it.

Then we’ve got the looming uncertainty of Dodd-Frank. Credit has begun to ease in many sectors except for residential lending. And I swear I will not stop harping on this until the day I die: despite the bank bailouts in our post-credit crunch world, they ain’t lending. Now a compromised Dodd-Frank financial reform law opens a whole new can of uncertainty: at Inman’s Real Estate Connect, we learned there are yet 300 to 400 new laws and rules yet to be written by feds for Dodd-Frank. Uncertainty. Great piece in the Washington Post today about how Alan Greenspan may have started this “planned economy” in the 1990′s by focusing on markets, asset pricing and a nonsensical catch-all he called “investor confidence”: too much tinkering with the equity markets.

Today, we have uncertainty with a capital U. Washington can talk all it wants, but the turth is, lenders are still not compelled to lend. They still have way too much bad debt to deal with.

The Federal Reserve hopes to stimulate the economy by providing near 0% free money to lenders to keep interest rates artificially low. “Free” money: consumers are not seeing much of it.

So the banks are skating on thin ice. They really cannot lend to people with job insecurity, with housing prices threatening to slide even lower, and with foreclosures that may take years to work through. Aside: Jonathan tells me it takes THREE YEARS to work through a foreclosure in the state of New York, there’s so much red tape.

Banks prefer to borrow for free and make risk-free loans at 4%. Jonathan and other experts actually think higher interest rates might help us all. After all, the low rates are not helping. Why not raise rates a bit so banks will be incentivized to loan, argues Jonathan, since home prices are so depressed anyhow.

“The missing ingredient for a housing recovery is consumer access to credit, NOT low mortgage rates, ” he says.

— Daily Local Real Estate Dish By Dallas Real Estate Insider — Candy Evans at CandysDirt.com