If you are thinking about purchasing or refinancing a commercial property.
In an unprecedented move, the FED cut its core indexes in a intra-meeting by 75 basis points (3/4 of a point or .75%—the last time the govie did this was after 9/11).
What does this mean to commercial property owners?
Plenty, particularly when you consider alot of banks peg their rates to the prime rate.
So with one day rate drop from 7.25% to 6.50%, what should you do?
The FED is meeting again next week, at which time there might be another downward movement—if this doesn’t come to fruition, it’s time to “lock and load” (particularly if you got a commercial mortgage in the last 12-18 months).
I’ll be monitoring the commercial markets intensely in the upcoming days and will avail myself to anyone that needs guidance on this matter.
I think that 3/4 point rate cut indicates that the government is getting desperate! I think the government believes that some of the BIG banks are going to fail and they are DESPERATELY trying to keep the economy afloat. In addition, I believe that they think we are on the verge of a deep recession or even a depression. I think it’s all common sense. Our economy is based on consumer spending. The consumer is tapped out. The equity in their houses are gone. Their credit cards are tapped out. Game over!
In addition, China knows that they’re holding a bunch of increasing worthless dollars. When they flood the US with dollars, we’re in BIG trouble.
I follow this stuff as much as any astute investor should and there is just something I cannot seem to grasp and I’m obviously missing something here so hopefully someone can clear this up for me.
Secondary market lenders are closing their doors, thousands of jobs are being lost, billions of dollars are being lost, verge of recession, etc…It’s as if anyone who got a subprime mortgage in the last few years suddenly stopped paying at once! Of course this isn’t the case. Are there seriously that many people who have missed a payment, went into foreclosure, etc? Maybe I’m oblivious to how bad it is because from what I understand the worst spots are places like California, Nevada, Arizona, Florida, Virginia and I’m in WV. I watch for foreclosures to try and get a good deal, I am looking everyday, and they just are not there.
So my questions to everyone is this: Is it that bad out there and I’m just not seeing it in my area/region? Between Citi, Lehman, Merrill, Bear Sterns, and others they have written off 10,20,30 billion dollars every other day. That’s a ton on money, are they really losing it or are they just getting rid of it before it goes bad? I just can’t seem to get my arms around this.
You make a valid point, one that I agree with—the government is desperate to stave off inflation, recession and no what appears to be a lack of confidence in not only in the banking/real estate sector, but Wall St. itself.
If there is any solice to this, commercial lending (with the exception of those tied to conduits) has gone relatively unscathed during the credit crunch and this is going to be a good thing for investors that are in the position to capitalize on the migration from homeownership back to tenancy (whether we own it or rent it, we still need to live in something and renting is better then living outdoors).
As to the USA being screwed if it all goes down the toilet, I would argue that the global economy at large is going suffer right along with us (We have consumers and producers—without each other, we both suffer).
I have to disagree with Scott that commercial lending has gone unscathed. Several lenders that catered to the less than $5m market have bitten the dust. (Remember Impac? How about Greenpoint?) In addition, for most of Q4 2007, it was reported to me that Wall St wasn’t buying commercial mortgage securities. Only Fannie and Freddie were buying, and they only buy multi-family paper.
More to the point, commercial and residential mortgage rates currently have a significant premium built into them based on the perceived risks in the current market. (I read a report today that pegged the premium at 50 basis points.) While rates may drop further, it may have nothing to do with Fed action. Instead, it may be due to investors becoming more comfortable and eliminating the risk premium and to greater liquidity - more money available for commercial lending.
Moreover, what the Fed does often has little correlation to mortgage rates. Mortgage rates GENERALLY (not always) follow treasury rates, and treasury rates are more heavily influenced by perceived inflationary risks, not Fed action. In fact, Fed action sometimes has exactly the opposite effect, pushing mortgage rates up slightly because the market worries that Fed rate lowerings might ignite inflation. Today, I tried unsuccessfully to get letters of interest for two of my customers. The lenders with which I was working wouldn’t issue because of the Fed action. They saw too much volatility to peg a rate.
I appreciate your input, but I think it’s important to point out that the two examples you provided had a residential component connected to it and as a result, was an impetus for their demise.
Relatively unscathed was my choice of words and was careful to point out that the conduit lenders (those relying on Wall St. and or the capital markets–aka portfolio lenders) weren’t as fortunate.
Case in point and my personal favorite for small balance lending (also the dominating force in its space), LaSalle exited the market this week.
I was careful to not mention any correlation to the FED drop to residential lending markets, but I must disagree that commercial lending in part isn’t effected by the FED movement (a lot of lenders basing their prevailing rates on PRIME +).
Moreover, mortgage rates (at least on the residential side) are solely motivated and follow MBS (mortgage backed securities) movement amoungst other factors (like inflation and other economic factors).
I’m a big fan of institutionalized capital these days, but you are right, the portfolio guys are spooked (although conduit lenders were the lending driving force between 2005-2006, I believe you will see more conduit/portfolio lenders falling out without the relief from the capital markets).
The remaining commercial lenders are cherry picking now—if your deal isn’t a cherry, it doesn’t get picked…
In the end, I believe it’s safe to say that we both make a valid argument.
One negative to the Fed rate drops (on the personal side) is that it tends to keep my customers on the sidelines. Too many, especially the less experienced, think if they just wait a few weeks, their rates are going to get better. I have to explain to them that it just doesn’t work that way. Sometimes it does. This time it may, especially now that LIBOR and SWAP seem to be following the treasury. But do you really want to risk losing that opportunity because you thought rates might tick down a bit more?
The reason it is bad is because of all of the derivative trades, credit insurance, and repackaging of all the loans. There is an estimated 45 TRILLION dollars of credit default swaps in force. A CDS is a privately written insurance bet covering the default of a specified secuirty. Most of them are just bets placed, not actually involving holders of debts.
The significance of it is that it has become darn near impossible for the markets to value all of the securities. If they can’t figure out what something is worth, the whole system becomes a house of cards.
I agee with your overall take that this is a desperate action. My gut feeling is that this drastic (or desperate) Fed action means they are extremely worried about either keeping the banks solvent and/or heading off a very ugly securities market meltdown. I am thinking they view both situations as just needing some time to stabilize.
I do not think they would act this drastically if it was a run of the mill recession fear.
I have been beating my brains out looking for investment property that cash flows with financing and prudent allowance for expenses and reserves. Nothing. What I’m finding will barely cash flow for a cash purchase. I think the greed:fear ratio in real estate is still seriously out of whack, and I think commercial real estate is going to sink.
Those opinions and a couple of bucks will get you a coffee at Dunkin Donuts. :biggrin