AFT: Do you see these indicators, the early signs of a recovery, coming to light anytime soon?
CT: Not yet. We’re still in the thick of it. However, the signs that we’re reaching the bottom are clearly there. Prices for homes have gotten into a realm that is starting to make sense. You are starting to see the beginning of an increase in sales. You’re starting to see the basic signs that assets are getting back to a level that makes sense. When you add this all up, we’re moving through this.
Everybody keeps freaking out, thinking that whatever happens today is going to happen tomorrow, but it’s that same mentality that got us into this mess in the first place. It’s the easiest way to think about the economy, and I mean that with disdain. The standard view of the world is that the trend is your friend. And it’s exactly that kind of thinking that’s the problem. People should be thinking about fundamentals.
AFT: What do you think of the Obama administration’s response to this crisis?
CT: Under the circumstances, I think it’s been very good. There have been parts of some programs I don’t like. I don’t care for their homeowner bailout bill. I think their fiscal spending is weighted too heavily at the back end. However, you have to remember that the Obama administration has an important restriction upon their ability to do anything—they’re the executive branch. They’re supposed to enforce laws, they don’t make laws; they’re supposed to enforce programs, they don’t design programs. Considering that he has 532 knuckleheads between him and results, I think he’s doing a hell of a good job.
AFT: When will we see GDP growth again?
CT: You’re going to see GDP start to grow again in the first and second quarter of 2010.
AFT: Any words of advice for single-family and multifamily developers?
CT: Take a deep breath and just recognize that this too shall pass. Think about fundamentals and stop thinking about trends. Trends are not your friend; your friend is fundamentals. When you sit down and remember that, you’ll see that things aren’t that bad, and we will get through this.
Interview Extras
Q: When did you begin warning folks of the housing bubble, and what were the leading indicators on which you based that forecast?
A: I was talking about housing in 2003. I thought the increases in home prices we had seen between 2000 and 2003 were understandable primarily because of the falling interest rates. But what I said was, interest rates have bottomed out and are starting to come up, we’re clearly building up a big slew of new homes, and incomes really hadn’t recovered substantially from the 2001 downturn.
So I said, at this point in time I expect home prices to go flat and if they do continue to grow from here, it’s a bubble. And that’s exactly what happened. They starting growing in 2003 and accelerated in 2004 and I just kept saying: now they’re 10 percent overvalued, now they’re 15 percent overvalued, now they’re 40 percent overvalued. And by 2005 I got sick of hearing myself say this is going to pop.
Then, at the end of 2005, everything started falling apart and throughout 2006 I had to fight all the noise about this being a soft landing. It was shocking to me how the industry would just twist any kind of fact to try and support this idea that things were fine.
Q: What geographic markets will lag the recovery? Is it a question of however high you went up in valuations is how far you’re going to fall?
A: More or less. The big five is Florida, Arizona, Nevada, California, and the DC area like northern Virginia. Those have been places with the greatest bubbles but you also had some big increases in Boston and New York and some of the big metro areas, like Atlanta, Minneapolis-St. Paul and Seattle. But then you look at a place like Texas, you hardly see any sign of a big price bubble but what you do see in Texas, that I think is going to be a real problem, is vast swaths of empty homes, I don’t know what they’re going to do about all that excess inventory. But this bubble has been reflected so many different ways in so many different places. In Ohio and Indiana you can argue that they didn’t have a housing bubble, because the economy was too bad for homebuilders to be exceptionally optimistic.
Q: When do you see the multifamily industry recovering? Will it lag the rest of the economy, or recover sooner since the multifamily industry hasn’t overbuilt and is still fundamentally sound?
A: The rental side of multifamily has not seen a huge increase [in supply], but of course the ability for that to be maintained will be critically dependent upon how many condos end up in the market as rental units, in which case, guess what? We do have a big supply of multifamily. It’s pretty clear in big markets, rents have been coming down slowly and vacancy rates are rising, even though a lot of people are getting foreclosed on. And the only way to explain that is because there is this big shadow market, and that’s having a negative impact.
Q: How would you rate the multifamily industry’s health relative to other commercial real estate industries?
A: It’s better but it’s a function of degrees. Apartments had cap rates fall too far. People overpaid for apartments the last couple of years. I think in the rising unemployment numbers, you’re seeing that risk start to play out in the rental market. So yes there is going to be some pain there. People overleveraged and bought too much, and now they’re in trouble. So it may be better, but it’s a function of degrees, not a function of immunity.
Q: How would you rate the multifamily industry’s health relative to the single-family industry?
A: It’s clearly better on the apartment side. However the big problem there is how much rental units are going to be impacted by the shadow market, the rental of condos or of single-family homes. And its pretty clear in big markets, you look at California or Arizona, rents have been coming down slowly and vacancy rates are rising, even though a lot of people are getting foreclosed on. And the only way to explain that is because there is this big shadow market, and that’s having a negative impact.
