The Real in Real Estate

October 18, 2009 

In my upcoming Book, “Blind Vision”, I discuss the root cause of the financial chaos that is taking place in this Country. The topic, unfortunately, though rich in the systemic realities, time and space (and a reader’s attention span) simply do not allow for a detailed scope as to the extent of the problem and why, at this point, we are only seeing a glimmer of what is yet to come.  Still,  when taken as a body of work, I truly do believe you will be the richer for it and so will our Country. 

And though a blog posting is certainly no better a forum to go in to the details of the issue, it is however an excellent venue to provide “bite-size” renditions that although brief, will give a reader cues to watch for. 

Let us start with a summary comment on “why” the problem occurs: 

  1. The financial system is supported on a premise which requires and seeds the notion of “perpetual inflation” (PI).
  2. “PI”, like all Flat Earth Idolatries, is the product of a manufactured ideology that sole purpose is to create and profit from the manufactured demand that “seeds” the cycle of “Faux Profit”.  It its simplest terms, it appears this way: Create the illusion of demand that creates the illusion of insufficient supply.  These pressures create the illusion of rising price which both triggers “Impulse Demand” which further stimulates rising prices and artificial “Pricing Structures”.
  3. Financial Interests, as the architects of “PI”, seek ever expanding returns and void risk-adverse strategies to further stimulate the “seeding” practice in support of the “Faux Profit” enterprise.  

In essence, what you have is a completely manufactured economic cycle that is based purely upon an artificial foundation. In other words, ever increasing price pressure create the illusion of Equity that “seeds” further borrowing which entices further spending.  This, then, begets the dreaded “Inflationary Economic Spiral” that fuels the “Faux Economic Cycle”. 

This “Faux  Economic Cycle” not only happens in Real Estate from a development stand point, it is, in fact, at the core of the U.S. Economic and Financial Collapse.  All driven by the U.S. Government, I might add and the supremely vacant notion o f “service-based” economics. 

More important though is that this is not just a U.S. phenomenon, this practice plays out in other parts of the world where the very same illusion finds a willing resource, for example, Dubai, Unite Arab Emirates and in various parts of the Pacific Rim.  Specifically, in the case of Dubai, the speculative Real Estate construction boom showed its first signs of weakness in early 2008 when the various construction and financial related “frauds” began to surface. These very types of scandals always precede a collapse primarily as they are the initial indicators of excess. 

But always, the ultimate collapse occurs due to the blatant violation of a fundamental economic rule: Value Given must always equal, value received.  Or, to put it more bluntly, you can never extract value out of a system beyond that which the system can not only create, but that it can economically sustain!  I don’t make this stuff up, that’s just the way it is!

Now, the following is a list of the basic “why’s” the system is collapsing: 

  • The financing demands exceed the financial sustainability or, economic viability of the “cycle”.
  • The “Artificial Price Structure” begins to collapse.  And this occurs because,
  • The “Impulse Demand” becomes “risk adverse” because the “Artificial Price Structure” has reached an unsustainable level. This occurs due to,
  • The “Faux Profit” model, being mathematically unsustainable, begins to retract in order to attempt to “stimulate” and sustain the “Impulse Demand”.  However,
  • Once the “risk adverse” component is triggered, the ensuing collapse in demand triggers further capitulation of the “Impulse Demand” dynamic. 

To grasp the concepts more clearly one just simply has to observe the vulnerable nature of the “house of cards” anecdote: the removal of simply one card can set off an unrecoverable collapse. Which is to say, an economy can never expand beyond the fundamental core component of sustainable and productive “wealth creation” and this fundamental economic truth is why Inflationary Economic Spirals  promoted by the FEI of Faux Economics always create virulent boom/bust cycles which is the trade mark of these economic cycles. 

It is true, yes, we’ve seen the collapse of the Mortgage related financial industry in the U.S. over the past, moving on, 3 years, however, this is largely related to residential real estate market.  What we have not seen, yet, is the collapse of the Commercial Real Estate Market which, for now, is being suspended because of the rush of investors to so-called “hard assets.”  However, this is temporary for many of the reasons I mention above, but rest assured, it is coming and I predict it will be in full swing by the second quarter of 2010 and here are a few general comments worth noting: 

  • The Retail/Mixed-Use developments will soon begin to show their vulnerabilities (mortgage default) due to increase “Vacancy Rates”. The vacancy rates are climbing in this “sites” due to the continued contraction in consumer spending and the increased efficiencies of “web” based commerce. These are cash-flow sustained investments which rarely can sustain vacancy rates in the +20-15% range.  In nearly every major metro-area, the indexes are showing vacancy rates in excess of these numbers.
  • The Commercial Office (type) Properties are experiencing much the same systemic collapse. The often greater risk to these types of properties is typically caused by the fact that they are often located in higher land-cost environments and the construction composition of high rise type construction is often much higher than the less demanding properties referenced in the previous reference.  As such, these properties frequently are unsustainable, financially, with vacancy rates as low as 10%.  Needless to say, “office space” vacancy rates are skyrocketing.  In some major-metro areas of Arizona and California, which are national market “trend-indicators”, are well in excess of 20%, and climbing! 

What does this mean?   Further financial market collapse however, the following are a list of the “financing” segments that will bear the brunt of the coming calamity: 

  • Insurance Companies: traditional sources of commercial “paper”.
  • Pension Funds: “public” and “private” also frequent financing sources
  • Institutional Investors: again, a common source of funds. 

Once has only to look at the consequential affects to entities such as Orange County California  to see what “leveraged” position can do to an investment portfolio and this is only one small example of what is around the corner!  It is, in fact, so severe a risk, you won’t dare hear it discussed in the Media while the Government and Mr. Bernanke simply have their heads in the sand! 

Now, one last observation:  Add to all of this the effects “derivatives” and the U.S. Governments continued blind and mindless spending, you have a near apocalyptic scenario quietly brewing behind the emerald curtain! 

What do “derivatives” have to do with this inchoate mess?  Simple, much of the debt was secured using the “notional value” of underlying assets that are simply “paper investments”, yes, derivatives.  Also, there are various “commercial” portfolios that contain hundreds of billions of dollars of these security instruments (loans) that were resold on the market and also collateralized to the market using the same speculative approach, again, “derivatives”. I’ve seen estimates of the International Bank of Settlements  that estimate the total notional value of derivative in the $700 Trillion range!!  Now, if you include the “notional” value of the secuities not included in the summary, the total moves closer to the $1000 Trillion mark! 

This is what awaits the System and while the Government plays politics over the idiotic notion of “health care” and “Afghanistan”, people continue to loose jobs, industry continues to shut down, States in financial free-fall and the U.S. Government talks about “cap and trade” legislation and “fairness doctrine”! 

This is not doom and gloom, this is reality and I can identify not a single person in Government that has even the slightest clue as to the nature and extent of this coming tsunami!  Rest assured though, there will be a Stimulus Package for it and a trip by Mr. Obama to China, this time, he’ll be on his knees!!! 

It is a very sad time for Americans!  You wanted “CHANGE” and that be all you have left to account for your hard work before all of the dust settles and it’s going to be a long, long time before you’ll see clear toward tomorrow! 

Turn off your sports shows, your reality shows, the cage fights, forget the latte’s and the pseudo-eco-conscious buzz! Put your hat on straight, conceal your anatomy and get real!  Change the Conversation! Demand “BEST Practices”, accept nothing less! 

There’s a reason for why: “On Point * On Purpose * In Practice”! 

We’re facing critical to severe restructuring and little, if anything is being done to combat what is only just beginning to surface.  The time for “idle chatter”, has past!  It’s time to get real!

Curtis C. Greco, Founder

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