Tuesday, January 12, 2010

Dimon Calls Commercial Real Estate a 'Train Wreck'

President Obama's favorite banker, J.P. Morgan Chase Chief Executive Jamie Dimon, said commercial real estate is a "train wreck" during a speech Monday, but noted that many of the problems in the sector have already happened and won't affect the economy too much.
With roughly $3.5 trillion in commercial real estate loans outstanding, a sizable portion of that debt needs to be refinanced each year. However, the problem is that the value of the properties backing those loans has fallen, he said.
Investors specializing in distressed debt and foreign buyers have been attracted by the lower prices, which has helped refinancing activity. Deals often take the form of a recapitalization, in which the lenders become the equity holders, Dimon added.
Such transactions have less of an economic impact, Dimon said, noting that when the owners of an office building change, that doesn't necessarily trigger layoffs.
Meanwhile, the worst of the residential real estate crisis may have passed, Dimon said. Prices have "leveled off" in many parts of the U.S. during the past six months and affordability has improved, he added.
Dimon predicted more foreclosures, but described them as a "constant flow," rather than a "wave."
Notice the difference in the way the commercial market is resolving itself rather rapidly, while the housing sector, with heavy government involvement, remains confused.
Real estate is probably at or near its bottom. While I fully expect a second leg downward in the recession, the stock market, bond market and commodities are more likely at the epicenter of the second leg.


  1. "Real estate is probably at or near its bottom."

    Bob, are you referring to CRE in this statement, or do you think we have bottomed in residential as well? What about the shadow inventory of homes (foreclosures that should have happened but haven't so the loans don't have to be marked down) and all that?

  2. I was making a general reference to all real estate. Obviously, housing is tricky, but if Dimon is correct and it stays as a steady flow rather than one big wave, the bottom will probably be hit soon, or has been hit. It is surprises that really smash markets. The housing market is no longer a surprise. If I was in the market for a house, I would start looking now. I wouldn't rush into anything, but if you find an exceptional steal take it.

  3. Hi Bob,

    Long time reader, first time commenter.

    Do you think residential homes prices are at or near a bottom in nominal and real terms? Or just nominal?

    Do you think the first time buyer tax credit ending and mortgage rates rising will drive prices down or will these factors just keep home prices from rising?

  4. if your predicted rise in interest rates comes to pass, a housing bottom would be pretty far off from here.

  5. @ Tom Garrett

    Both in real terms and nominal terms. Over the next year or so, you shouldn't see much difference between real and nominal prices.

    If inflation picks up down the road, and I am talking a year or more down the road, housing prices will likely climb in both real and nominal terms. Housing will lead price inflation.

    As for the first time tax credit etc, there is still a lot of supply of housing coming on the market with less demand. However, this is likely factored in current prices in that no one is out there bidding up houses right now, and most people think it is not a good time to buy a house.

    All that said picking a bottom is real tricky. My thinking is mmore in line with, "WE are a lot closer to the bottom than the top. If I want a house, I am going to start looking now and look for a real bargain, but absolutely be in no hurry. It's a time to find deals and wait out sellers and get a better deal."

    For investors, the trick is to make sure anything you buy is immediately cash flow positive.


    Rates will climb BUT if they are not enough to compensate for inflation, house prices will climb also.

    This is what I eventually anticipate. The Fed buying Treasury paper, thus creating monetary inflation and keeping rate below the real rate, which will boost asset prices, including housing.