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While the national media focus on wondering when the current recession will be over and we can return to “Normal”, I am wondering if this isn’t the beginning of a new and different financial era for the entire world. I am not sure “Normal” will ever return … because the economy of the last several years wasn’t “Normal” in the first place.

The performance of the larger economy has a HUGE impact on Commercial Real Estate as a sector and on how you can best find, buy and profitably manage your own Commercial Properties. Today you just cannot avoid knowing as much as possible about the Macro-Economic times we find ourselves in.

And, in the long run, the worse the economy the more positive the outlook for Multifamily Properties becomes.

Here is some important data to back up my concerns that has been relegated to only minor stories in the press. These are enormous red flags of a deep Recession and restructuring of our Economy when they are taken as a whole.

Three Signs The End Is Near …

1) The Mortgage Equity Withdrawal Crater

One of the drivers behind the economic expansion of 2003-2006 was home owners tapping the equity in single family houses and spending it. This collective raiding of the home equity piggy bank is called Mortgage Equity Withdrawal or MEW and is tracked on a national level.
In 2004 $754 Billion
In 2005 $743 B
2006 $521 B
2007 $473 B

That’s several trillions poured into the economy by withdrawing home equity over the last few years. Money that was not earned in any way and was based on artificially inflated home values that are now coming down to earth.

Fast Forward to 2008 …
Last quarter saw a measly $4B in MEW’s. Most of the reason for this is that owner’s equity has vanished as home values drop. Add to this the difficulty in getting a loan these days and you can see how this source of cash has vanished. The predictions for MEW’s in Q4 of 2008 are about $5B. The well is dry.

2) Our Economic Engine has Died – it’s the Consumer, silly

Over 70% of our GDP is powered directly or indirectly by Consumer Spending – that’s you and me buying stuff. Just think about that for a moment – 70% of the economic activity in our country is based on you and I making personal purchasing decisions.

What happens if the Consumer stops buying? Well … we are going to find soon, because Consumer spending fell off a cliff last month.

WSJ reported this week that 14 “major” retail chains have filed for bankruptcy in 2008 – Circuit City is the largest example. Car sales have stopped. The driver of our economy has stepped away from the wheel.

3) Signs the Consumer is COMPLETELY tapped out …

Last week, the Wall Street Journal published an article on just how bad it is in a sector you would expect to be roaring right now … Debt Collectors !

It turns out that even debt collectors are posting multimillion dollar losses. The weary Consumer is so strapped, even a debt collector can’t make a living. John Nemo who represents 3500 Debt Collection Agencies nationwide said, “More and more accounts are going out to debt collectors, but the money is getting harder than ever to collect”. You cannot squeeze water out of a stone.
When the Consumer is not consuming … who will drive the economy ??

I will quote Justin Fox from an article in the latest edition of Time magazine … “Because Consumers and business aren’t spending enough to keep the economy growing, government needs to do the spending itself”. Scares the snot out of me !

What happens next?

Jobs are being lost, wages are not growing, companies are failing and the spigot of MEW’s are shut off. The Consumer has no option but to scrimp and save. There is no way back to the “Normal” times of the economy of 2003 – 2007 … because they weren’t Normal. We have to all ask ourselves what our economy looks like without Consumer Spending powering over 70% of the GDP.

Your guess is as good as mine AND the new reality will take shape in these next 18 months. The national pundits have predicted the end of our Consumer driven economy if we develop even an 2% savings rate as a nation. Sheesh what is the poor (literally) Consumer to do?

In the meantime …
Hold onto your cash and watch for Multifamily bargains once getting a mortgage becomes a little easier. You will also want to brush up on your ability to negotiate significant chunks of Owner Financing to get your deals done.

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