House Fix It Blog

“Civilization ends at the Hudson River”

Notwithstanding the recent notoriety US Airways Captain Schullenberger gave the Hudson River, there is an old saying in Manhattan that “Civilization ends at the east bank of the Hudson River.” Those who espouse this belief add to its arrogance by stating that the Mayor of New York City holds the second most powerful job in the world. So that leaves the rest of us somewhere between Hee Haw and a Saturday night tractor pull.

Enter Wall Street and real estate. For the past 25 years the investment banking community has been trying to treat real estate like a stock or bond. As you know, stocks and bonds represent a “claim” upon the assets of public corporations, and most of these assets are goodwill. In the United States today, with some exceptions such as REIT’s, human capital produces earnings rather than earnings produced from traditional brick and mortar assets. But real estate is “dirt” and as Will Rogers said years ago “Buy land, they ain’t makin’ any more of it.” The loans against real estate are mortgages or trust deeds, and the security for these instruments is the land and improvements on it.

Contrary to what the media has told us over the past 12 months, there has not been a real estate collapse; the land is still there and the improvements are still there. What collapsed was the “House of Cards” created by Wall Street to expand the CDO (Collateralized Debt Obligations) market to an unrealistic level. Derivatives and fractionalized mortgage bundles do not provide any security to the holder as many hedge funds and pension plans have discovered. As a nation, we are paying the price for straying from the basic tenets of making real estate loans.

If Wall Street is the epicenter of world finance, it follows that it is also the epicenter of world confidence. Despite a change of administration in Washington, the folks in the Hinterland have lost their confidence, they are scared, and scared people don’t borrow money or make purchases. Yes, the confidence will return, but not at the same rate that it was lost. “Once burned, twice shy”.

Tags: CDO, Collateralized Debt Obligations, Derivatives, economy, fractionalized mortgage bundles, real estate collapse, real estate market, Wall Street

This entry was posted on Thursday, January 29th, 2009 at 2:27 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.