Inman BULL vs BEAR Debate

A: As usual, the Inman Real Estate Connect conference was lively, entertaining, educational, and filled with young entrepreneurs showing off their advancing applications. It was great to see old friends again, and a pleasure to speak on the 2nd Bull vs Bear debate. I don't have video of the debate, yet, so I'll try to muster up some damaged brain cells (thank you Red Bull & Grey Goose for that) and point out some of the topics discussed. Overall, it was still biased towards the bearish side, however, not as bearish as January's panel. In other words, less bearish with glimpses of hope seem to pop up.

John Williams - Definitely the most bearish on the panel, discussed the concept of dollar destruction and hyper inflation. His serious tone clearly was interpreted by me that he is a true believer in government bent statistics on inflation and unemployment, and that the worst is yet to come. If the US dollar really does go to 'zero', and hyper inflation sets in, we may be in store for Zimbabwe style currency notes.

I disagree with the total dollar destruction and hyper inflation, mainly because I do not see wage inflation and rather, we are experiencing the side effects of commodity inflation (food & energy inflation) that arises when a central banks' primary focus is on reviving economic growth at the mercy of the local currency. The best medicine for high commodity prices IS high commodity prices that cause demand destruction and eventually a speculative trading reversal. In my humble opinion and as I stated many months ago, our dollar will get a boost as foreign CB's are forced to eventually lower rates to combat their own slowdowns right at the time our CB will shift their rate actions towards inflation fighting.

Yves Smith - Bearish, yet a realist. We have debt problems, trade deficit issues, state budget issues, etc., and Yves takes all this into account. The current account deficit seemed to be her main concern as fears arise that foreigners may slow down purchases of our debt, sending treasury yields surging. This is definitely a possibility although we need to see the AAA credit worthiness of our government be called into question, and further dollar erosion for this to become more likely. I don't remember the other topics Yves talked about, so I need to get the video of the debate to refresh my memory.

Bill from Calculated Risk - Fantastic on the panel and very down to earth. While he is putting the bottom of the housing downturn around 2010 - 2011, and recovery a few years later, he openly admitted his 'less bearish' stance on housing. In his words, "...there is a time element here. If you asked me in 2005 how bearish I was, I would have said much more bearish than I am today". Clearly Bill feels that we have experienced a good portion of the pain thus far, but likely to feel a bit more before its over. The contrarian in him seemed to come out as I got a sense that he is of the mindset that deals are to be had in the coming year or so, and investors' money is already being put to work buying distressed/foreclosed properties that are finally now CASH FLOW POSITIVE!

That is a very important element to clearing up inventory levels; a dynamic that must happen if we are to see a bottom. The following days existing home sales report confirmed what Bill mentioned, as it was revealed that a staggering 30% of all existing home sales were foreclosure purchases. Clearly, investors are finding value in homes priced at 40-50 cents on the dollar! I would be too!

Think about it this way, to pick the exact bottom you MUST buy while the asset is down & out, distressed, and the seller's fear/nervousness is still high. Only in hindsight will we see the bottom, which according to some law of physics, will mean you missed it!

Avram Goldman - This CEO of 12+ PAC Union GMAC realty offices was definitely the most bullish of the bunch. He is looking ahead to brighter times and seemed to believe that his markets have already bottomed, are seeing a reduction in inventory levels, and a pickup in sales volume. Certainly comforting statements.

I did question his rear-view mirror approach though about mid way through the panel, saying something to the extent that we still have a contracting credit system and rising unemployment that will put future pressure on housing affordability; thus we need to look ahead rather than behind us. I don't recall his response or if the moderator changed topics right after that. All in all, I thought Avram was a great addition to the panel and brought a more realtor/front line perspective to a heavily weighted economics led panel base.

Dottie Herman - I got the impression that Dottie was a bit more bearish than she was last January, but in true fashion, the most composed of the bunch in terms of the worst being behind us. She did discuss the problem of credit, but addressed the pass down of wealth from parents and grandparents as a saving grace to contracting loan availability and tighter lending standards that we are dealing with now.

I sense that Dottie sees some issues still on the horizon, but that with problems comes opportunity.

Noah Rosenblatt - Yours truly. I tried to spice it up a bit and fight with my fellow panelists to get a lively debate going. I recall questioning with Avram on looking ahead rather than behind us at lagging statistics, and I disagreed with John Williams hyper inflation statement. Yes, I see inflation out there, but it's commodity inflation coming at the same time as housing and credit DEFLATION! The amount of credit destruction is astonishing and the shadow banking system has seen hundreds of billions of dollars destroyed by deflating toxic assets, that are consistently being written down to lower values.

I mostly discussed the issues I see ahead of us as a crisis of confidence in our banking system and GSE's (a mention to the potential problem of raising money could be devastating), continued pressure on jobs, the credit markets, and wages; all which affect affordability of a home purchase. Combine that with surging commodity prices, and the consumer is tapped out. I just think that these forces will take longer to play out, thats all.

My one bright spot, was the possibility of rising sales volume resulting in a stabilization or even reduction of inventory levels in our near future (a must for any recovery in housing), as potentially easing the credit markets! This didn't happen yet, but certainly is a possibility as house prices fall further and investors' eyes for cash flow positive properties light up. I agree fully with Bill on that dynamic.

But all in all, I think we still have pipeline pressure in housing reports amidst rising defaults and foreclosures. We still need to get these distressed transactions through the system and into the reports, which means we have more downside pressure to go through. As the cycle continues, I get more excited and less bearish.

I put my expectations on a mid-late 2009 bottom (not proven until 2010) and the potential beginning of a recovery in house prices on a national level to 2011. However, the recovery will not be a new bubble as over-regulation kicks in and housing as an asset class in general is looked upon quite differently.

Hopefully the video will be made available soon, so we can see the depth of the topics I discussed here. For now, this is what I remember. I thought the panel was great, although it went on some doomsday tangents a few times in terms of our deficit and our weak currency.

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