drevno

On Dubai's Default, CRE Loans and Frugal U.S. Consumers

I continue to be amazed how disconnected from economic reality or even common sense are the people who play with other people's money, e.g. banks who lend to wealthy dilettantes in the Middle East, or people who get a windfall, e.g. the oil sheiks of the Middle East.

Dubai is an artificial place in a land that should never have skyscrapers built in the tropical environment on fast-frozen foundations. In the oil-rich Middle East, fantastic but useless structures rise in one of the most inhospitable places on Earth. To build these skyscrapers and entire cities on sand and hot salty water requires gigantic inputs of energy and money. But it still serves no useful purpose, and the cost per square foot of office or retail space would deter all but the most stupid and ignorant organizations. The gilded hotels or fabulous residences could appeal only to the most extravagant or snobbish.

There is no rhyme or reason to expect Dubai and similar schemes to provide sound economic rationale for it's existence now or in the future, mainly due to its incredibly high energy cost. A lot of people will get financially hurt by this debacle instigated by irresponsible bank(er)s lending money to hairbrained schemes.

But look at it also positively: money expended on uselesss projects in Dubai went not only to the bankers for brokering this disaster or to a selected few architects and designers working at fabulous rates, but also to thousands of immigrant workers from the reagion and countless workers in factories producing millions of tons of steel and cement and carbon dioxide elwsewhere. Think of the shipping and trucking idustries that also got the cut from this make-believe project 'financed' by Dubai World.

But what is the likely lesson learned from this looming disaster? That financial prudence, banking regulation and reform, international checks and balances on megaprojects, or environmental responsibility is required by common sense? Or will be shareholders and bondholders be forever victims of unsound or manipulated data and/or bankruptcies like this, the English Channel Tunnel, or the other equally megalomaniac financial schemes of this century? I wish for the former, but am tired of holding my breath.

Greed, Fear and Loathing: What’s Next for Home Prices?

Very interesting analysis using somewhat unconventionally constructed variables. One thing is clear: we are - and have been for the last 6-9 months, in a very unconventional territory.

The wave of foreclosures announced by most large banks recently can only push house prices down. Affordability may well rise. But the the propensity to purchase a house or a condo, given the expected rise in unemployment ( and the uncertainty about the income), is likely to remain a bit subdued.

On the other hand, there is the inevitable churn in buying and selling of houses by those willing or being forced to change jobs, or due to other circumstances. Such purchase cannot be postponed indefinitely. Hence, I would expect a modest upturn in number f sales, albeit at significantly lower prices.

Housing Data Lifts the Markets

The February uptick in housing starts (22%) and new building permits (3%) is a good news but should be seen in a larger context. On the positive side, housing starts have been traditionally a leading economic indicator (not the only one!), pointing to an upturn in the economy some months down the road.

On the other hand, oversupply of existing unsold new housing units still exists, foreclosures that are increasing the supply of homes are not declining, and the prices are still southbound.

My gut feeling is that this February uptick is simply too speculative to put too much stock in it. For the builders of all sizes, the money, labor and material are now too cheap not to take a crack at it. But, the construction, if carried out, would provide a bit of extra employment and demand for building materials. And that is welcome.