Life Lessons Over Ten Years
As the ten year anniversary of the bankruptcy of Lehman Brothers approaches, I find myself asking, what have we learned in these interesting ten years? The week of September 15, 2008 was incredibly significant for the economic history of the world, it was when the reality of the depth of the financial crisis that spurred the Great Recession became undeniable and universally evident. It was also personally very significant; it was the week that I realized I had made the best decision to date in my professional life; that was to leave real estate investment banking to pursue a doctorate in finance full-time. I applied for the Ph. D. program in April 2018 at the urging, if fact, outright insistence of an outstanding mentor and friend, Dr. Randy Anderson. I did so because I believed my job, which focused on financing real estate development projects in Florida, would come to an end due to the nearly obvious real estate bubble bursting. It was a risky move, I started in late August of ’08, and in less than a month I knew it was a brilliant move. The rest as we say, is history, as I write this I am Academic Director and Clinical Asst. Professor at NYU’s Schack Institute of Real Estate and Managing Partner/Chief Economist of Lakemont Group, a boutique consultancy; neither of which would have happened without my Ph. D., which I would not have pursued but for the impending recession and my gut intuition about what was going to happen.
Ten years later I certainly have learned a lot, but what about the industry, the economy, and even the world? Here are my main observations:
1. Real Estate is Very Resilient – At the start of the recession, news media and some economists predicted a permanent decline in commercial and residential property values, construction volume, homeownership, and other dire consequences. The debt load on firms and homeowners was viewed as requiring decades from which to recover. What actually happened? Real estate activity slumped for a few years and began a slow and steady recovery, today commercial property prices have set all-time highs and many residential markets have almost fully recovered to the prior peak of pricing; homeownership is rising; and you can still get a 97% or higher mortgage to buy a house (but generally must prove income these days). Why did this happen? Investors and liquidity flooded into the market to buy “distressed” assets; I personally believe that $10 was raised for every $1 of available distressed deals (this is antidotal, I cannot prove with data, but suspect it’s close to true from personal observation) and ended up funding loans and investments of all types and risk levels. Further, banks and regulators actually handled themselves with relative intelligence by not fire selling assets and actually allowing new lending to occur. Today, I feel real estate is a much more secure asset class than believed prior; given pricing and returns, I can safely say the market agrees.
2. The “Bailouts” Worked – The government and its various regulatory apparatuses and related entities, mainly the Federal Reserve, kicked into high gear to arrest panic, stabilize markets, and prevent a feared “depression”. While still controversial from all sides, history says “it worked”. The Great Recession was long, but not really that deep by historical standards; further, we are in the midst of what may likely be the longest period of economic expansion in United States history (it has to persist until July 2019 to officially claim that title); I think we can all, public and private sectors, say “Mission Accomplished”. This may seem counter intuitive but consider the facts, according to ProPublica, the US government via various programs made a total of $627.4 billion in “outflows” to various entities including banks, auto companies, and Freddie Mac and Fannie Mae; to date, a total of $713.5 billion of “inflows” has been received meaning the taxpayer has profited $86.1 billion to date (20 investments of the original 780 are still outstanding as of August 2018). Bailout was a bad term, it made people think it was “free” money when in reality it was more of a high-interest, strongman loan program. While the events that made these bailout loans necessary were undoubtedly bad, the response, when scored with the benefit of hindsight, seems brilliant.
3. It Will Happen Again, But Not Like The Last Time – I began teaching college students in 2009 at UCF in Orlando, Florida. When I talked about the foreclosure process in Real Estate Principles, the class would devolve into a foreclosure workshop where I gave advice how to best handle real life situations my students and their families were then currently dealing with. In short, everyone knew and understood what had happened. Those of us working in real estate and finance understood on even a deeper level, and I hope we are all smarter for it. Why do I say it will happen again? Because a few years back I made the startling discovery, my students no longer “knew” or had any context for the Great Recession or how and why it really happened, and this was in Florida. In New York, I can now say the same is true of many masters’ students. This next generation is just as susceptible to getting caught in bubbles and manias as mine, it will happen again! However, it will not be same story, it will be something new. It will likely have its roots in the aftermath of this past financial collapse, perhaps encouraged by obscure parts of new regulations such as Dodd Frank (what are odds of unintended consequences in a 2300 page piece of legislation passed in a hurry? HIGH), or from sources yet to be known. In reality, I feel that most of the work to “protect” the system and the economy amounts to the equivalent installing fire sprinklers in a building that has already burnt down; right idea, wrong time, and utterly un-creative or forward thinking. When will this happen? I cannot say, but it will probably be in a decade or more at least.
4. Ten Years Later, and We Are Still Fearful – I speak at conferences and events around the country and I have been getting the “is the end near” question steadily since at least 2014. Ironically, this is the year that the recovery actually showed meaningful acceleration. In 2018, many ask questions as if they think the “peak” must have been reached and the next recession is upon us; this is year that GDP appears to be able to grow above 3% steadily and unemployment has settled below 4%. Thus, conditions are now setting themselves where we can have enough over-investment that can lead to a downturn in the future. Yet, many real estate investors, developing, and lenders have been “pulling back” for years. This is a good thing, essentially making the “peak and downturn” a self-defeating prophecy, for now. I believe this is due to something I have dubbed, the Hurricane Andrew Effect. I grew up in South Florida and Andrew was the first storm I experienced. Here is what I remember that matters today. Andrew was the first major hurricane South Florida had experienced since Hurricane Donna in 1960, a full 32 years before Andrew, thus many had “no idea” what a major hurricane could do. Andrew hit, and shocked/devastated South Florida (kind of like what happened in 2008 to real estate afterwards). In following hurricane seasons, Floridians would freak-out the minute a mere dark cloud would form over Biscayne Bay and begin preparing for doomsday by buying all the water at the grocery store and boarding up their windows. This is how I see the “seasoned” real estate professional behaving on the slightest mention of bad economic or market news. The main difference is that such behavior can actually stop or forestall future downturns by preventing over-investment and over-leverage; sadly, prepping or not prepping for a hurricane does nothing to influence the storm. Finally, there is no “rule” that says downturns happen every 8 to 10 years, this is a myth (I get asked all the time), the causes are almost always over-investment and over-leverage (or shock events like 9/11).
There are many more lessons learned by myself and others, but this covers the major items from my point of view. If you read this far, you may be wondering what do I actually “advocate” in terms of policy or recommend investors do to protect themselves or even if I think we will have a recession sometime in the future. All of these answers are nuanced, I would go farther but this article is long enough and I have to leave something for those who engage my consulting services. What to learn more, book me as a speaker at your next event. I will end with some questions. What did you learn? When do you think the next financial crisis will occur? Love to get feedback!