Friday, August 17, 2007

Real-Estate Meltdown, Just the Beginning?

Yesterday I posted on the mortgage crisis and the effect on the credit market and homeowners. The other side of the finance equation is of course real estate values. Today the Wall Street Journal reported that real-estate mutual funds (or 'REITs' in the finance world parlance) are posting huge losses with no end in sight.

From a Wall Street Journal article by Tom Lauricella:
Mutual funds specializing in real estate are getting clobbered, hit by a one-two punch of woes in the property markets and the tumult in the debt markets.

Although real-estate stocks staged a late rally yesterday, their recent troubles were highlighted this week by a 31% one-day drop in the stock of KKR Financial Holdings LLC Wednesday, a real-estate investment trust, after the company reported financing problems.

The result is that after seven years of spectacular gains, funds investing in real-estate investment trusts are posting huge losses -- some with losses topping 15% over just the past month. That is particularly bad news for investors who poured nearly $18 billion into these funds in the past year and a half.

Meeting Redemptions

As some investors sell, fund managers are forced to sell holdings to meet those redemptions.

The average real-estate fund investing primarily in the U.S. has lost 17.2% over the past three months and is down 16.5% so far this year, according to Morningstar Inc. In contrast, the average diversified U.S. stock fund is up 0.7% so far this year and down 5.9% over the past three months.


The average global real estate fund -- which will invest both in and outside the U.S. -- has shed 15.2% over the past three months and is down 10.3% since the start of 2007.

Wall Street Journal: Real-Estate Funds Are Hit Hard
Lets face it folks, we are at the beginning of a serious crisis in capital. Where will the bailout come from this time?

The end of the 90s saw the 'dot com' bubble burst which affected millions but was relatively isolated to a specific sector (information technology) and confined to specific urban markets, such as San Fransisco. This was a stage in the increasing finanicialization of capital.

Now capital needed a new outlet for reinvestment and real-estate provided the perfect opportunity. Combined with the massive boost given by investments in the war sector, the real-estate boom provided the much needed new outlet for capital investment.

It was clear from the outset, however, that with real wages decreasing and job growth static, that the real-estate investment strategy required cheap credit and lots of it. This, as we have seen, has been achieved through a combination of extremely low interest rates with increasingly aggressive (until recently) lending practices.

The current crisis is huge. Nearly every financial institution will be affected. Nearly every country will be affected. Consumer demand will be affected on a global scale. Real estate prices will deflate on a global scale.

It seems increasingly likely this very irresponsible and unsustainable run-up will lead to a global depression with dire consequences for all.

The financial capital sector must be reigned in. A socialist program for managing and regulating the financial sector is the only way to prevent such irresponsible behavior and prevent the cyclical boom and bust pattern that is inherent to capitalism, and which has (as we have seen) and will continue to, become increasingly painful with each subsequent cycle.

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