Developer Cutting Prices in The Metropolitan: 310 S. Michigan
The developer of The Metropolitan, at 310 S. Michigan, in the Loop (overlooking Millennium Park) recently sent out a marketing e-mail detailing large price cuts on 1, 2 and 3 bedroom units (some with lakeviews.)
Here are some details of the price cuts:
Unit #712: 1 bedroom, 1 bath
- Was priced at $299,900
- Now priced at $249,900
Unit #807: 2 bedroom, 2 bath
- Was priced at $534,900
- Now priced at $399,900
Unit #1201: 2 bedrooms, 2 baths, lake views
- Was priced at $789,900
- Now priced at $599,900
Unit #1003: 3 bedrooms, 2.5 baths, lake views
- Was priced at $959,900
- Now priced at $649,900
The ad says nothing about parking being included or not.
The discounts begin on May 16.
Some flippers continue to try and sell in the building. What will become of them with these deep developer price cuts?
Unit #806, a 1-bedroom unit, has been on the market since July 2008.
- Sold in March 2008 for $374,500
- Originally listed in July 2008 for $335,000
- Reduced
- Currently listed for $299,000 plus $50,000 for parking
- Assessments of $340 a month
- Taxes are “new”
- 791 square feet
- Pam Sullivan at Coldwell Banker has the listing. See the pictures here.
On an unrelated note, I just updated the Chicago area employment statistics: http://blog.lucidrealty.com/chicago_real_estate_statistics/
See last graph on page. The greater Chicago area has now lost 350,000 jobs since mid-2007 and it’s possible that we will soon see it at decade lows. The unemployment rate is already at the highest it’s been in 10 years.
look out below!
it seems like 75% of the units built or rehabbed during the last 10 years look exactly the same. Open floor plan, breakfast bar, granite countertops, SS, even the prices are the same. You could swap pictures of this unit with one of those one beds on southport and nobody would even know the differennce…the only distinguishing factors are the location or the view.
Metropolitan Tower is such a cool building in a great location. And then the developers had to mess it all up with units consisting primarily of plain white drywall and granite countertops. And to add insult to injury, they tried to charge ridiculously high prices. I feel like they’re trying to rip off buyers…this building had such potential but they had to be cheap about it. In reality these units (at least this one bedroom) is no different than the tens of thousands of cookie cutter units out there. This is about the closest chicago has to the equiv of high class residential buildings surrounding central park. Those are not filled with chintzy cookie cutter condos. This was a lost opportunity and I hope these developers suffer for their unwise choices.
That place seems pretty big and nice for a one bedroom.
“On an unrelated note, I just updated the Chicago area employment statistics: http://blog.lucidrealty.com/chicago_real_estate_statistics/”
Looks like Chicago is finally back to it’s trend line. Since these numbers are only through February, we may even be below it at this point.
http://imgprd.nrtwebservices.com/Chicago1/Properties/JPG_Main/844/618844_8.Jpg
The listing says a terrace but no pictures? Idiots, that would help it sell.
Here’s a graph of Japanese land prices (ignore the side commentary).
http://www.marketoracle.co.uk/images/japan-nationwide-real=estate-prices-housing-bust.png
As far as Chicago’s housing prices, I think we might be starting a new trendline – downward.
looks like the terrace is in an alley. maybe that’s why
one of the reasons for differences between this and apts on central park might be this was built for offices while they were built to be homes originally. of course the developers could have done better too.
Unless your unit faces east, these places are TERRIBLE. Who wants to look into an office building (the Santa Fe building) or west into an alley/office building? I can’t imagine the south view is much better… As someone that looks into the building each day (I work at 224 S. Michigan), I am not a fan.
“Metropolitan Tower is such a cool building in a great location. And then the developers had to mess it all up with units consisting primarily of plain white drywall and granite countertops. And to add insult to injury, they tried to charge ridiculously high prices. I feel like they’re trying to rip off buyers…this building had such potential but they had to be cheap about it. In reality these units (at least this one bedroom) is no different than the tens of thousands of cookie cutter units out there. This is about the closest chicago has to the equiv of high class residential buildings surrounding central park. Those are not filled with chintzy cookie cutter condos. This was a lost opportunity and I hope these developers suffer for their unwise choices.”
This is a wonderful building (Worked in this building back in the day), with excellent views of the lake.
HD – what would you have had the developer do? The new prices reflect the current economic reality, and they’re not pussyfooting with $10M price drops. Take a look at 2303 (Burnham residences), for something that breaks the “cookie cutter” condo from a floor plan stand point.
As far as the 8th floor unit, the views on the 8th floor suck and wont command a premium. It doesn’t make a lot of sense in my opinion to throw a bunch of high end finishes into a place like this that will won’t draw a premium. Additionally, there is only so much you can do with 750 sf
Its 791sf
Here’s the floor plan – http://www.themetropolitantower.com/residences_06.asp
LOL these flippers are toast. That being said, I think 250k for a 1/1 with parking at this address is indeed a deal.
The people buying this likely don’t care about the view: they’re paying for the address. And at 250k I don’t think they’re overpaying.
They could have reconfigured the floor plans, added better finishes, accepted less profit. The fact they can lower the price so much shows how large a profit margin they expected off cheapo finishes.
Here are some of the discounted units with some prior sales in the same tier for comparison. The closing prices most likely include parking (if any) and the askings most likely don’t, as far as I can tell. Sorry, but the public records aren’t clear yet on the parking.
Unit #712: 1 bedroom, 1 bath
Was priced at $299,900
Now priced at $249,900
Unit #812 closed 1/9/08 for $290,000
Unit #912 closed 1/11/08 for $321,000
Unit #807: 2 bedroom, 2 bath
Was priced at $534,900
Now priced at $399,900
Unit #1007 closed 8/7/08 for $557,500
Unit #1107 closed 2/26/08 for $592,500
Unit #1201: 2 bedrooms, 2 baths, lake views
Was priced at $789,900
Now priced at $599,900
Unit #801 closed 5/20/08 for $742,000
Unit #1001 closed 1/30/08 for $849,000
Unit #1003: 3 bedrooms, 2.5 baths, lake views
Was priced at $959,900
Now priced at $649,900
Unit #803 closed 12/17/07 for $878,500
Unit #1103 closed 2/15/08 for $1,212,000
Unit #1105: 2 bedrooms, 2 baths, lake views
Was priced at $919,900
Now priced at $649,900
Unit #905 closed 12/19/07 for $989,000
Unit #1005 closed 3/19/08 for $1,133,000
Unit #1013: 2 bedroom, 2 bath
Was priced at $534,900
Now priced at $399,900
Unit #913 closed 12/17/07 for $488,000
Unit #1113 closed 1/31/08 for $619,000
Nice comparison G!
I can only imagine what some of the people who bought in late 2007/early 2008 are thinking… Like when you pay $1,133,000 for 1005 and the people that will be living above you (1105) will pay less than $649,000…
“They could have reconfigured the floor plans, added better finishes, accepted less profit. The fact they can lower the price so much shows how large a profit margin they expected off cheapo finishes.”
How would you have reconfigured the floor plans while maximizing the value of the East and to a lesser extent the South views?
What level of finishes do you expect in a $300M condo?
What level of profit should a developer expect?
You don’t know what the developers financial situation is and why he’s marked down the pricing on what appears to be a few selected units.
“Unit 1003 Now priced at $649,900
Unit #803 closed 12/17/07 for $878,500
Unit #1103 closed 2/15/08 for $1,212,000”
Ouch! Way to overpay by nearly 100%
yes – thank you G!
these price reductinos prettty much guarantee some foreclosures in the building, which the banks will price below the current asking prices.
so the question now is how toxic will this building become? will it be a new 345 lasalle?
> What level of profit should a developer expect?
Generally at least 30%.
JohnnyU:
Unit #807: 2 bedroom, 2 bath
* Was priced at $534,900
* Now priced at $399,900
$135,000 reduction? That’s pure profit they’re slicing off the top. Or pure profit that this developer *thought* he was getting off the top! I’m sure they could have sacrificed a little profit for nicer finishes and maybe they’d sell a little better.
Take a look at a picture of the upper east side….how many of these units look at the face of buildings next door…and how many look onto the park?
http://www.andersonrealtyllc.com/skin/uppereast.jpg
http://www.andersonrealtyllc.com/skin/uppereast.jpg
> Here’s a graph of Japanese land prices (ignore the side commentary).
http://www.marketoracle.co.uk/images/japan-nationwide-real=estate-prices-housing-bust.png
Note to self: Base all financial decisions off of one or all of the following:
1. The Press/Media
2. Random Graphs/Images on the internet
3. Blogs
Note to self: Base all financial decisions off Brad.
“Note to self: Base all financial decisions off of one or all of the following:
1. The Press/Media
2. Random Graphs/Images on the internet
3. Blogs”
“> What level of profit should a developer expect?
Generally at least 30%.”
Based on what basis? Equity? Gross cost? Gross revenue?
And 30%, period, or 30%/year?
Counting any developer fees or not?
Well said regarding finishes, HD.
Not to hijack the subject, but I was casually looking at real estate in Japan (mostly outside Tokyo & Kansai) a few weeks ago and learned a couple interesting things. Japan has always been a land-poor country and apparently there are deep-set attitudes against selling land, so there is no shortage of parcels in the countryside owned by families long since moved to the city. The owners simply won’t entertain offers. I’m sure that gets in the way of efficient use of the land. At the same time, the countryside is getting hit hardest by the aging of the population/low birth rate, and the real estate that is available seems to be trading at quite depressed levels. The vintage country home with traditional roof tiles, tatami floors, a lovely garden and adjacent (small) fields can easily be had for under $200,000.
“Note to self: Base all financial decisions off Brad. ”
From his posts on here I’ve long suspected brad is “in the biz”. Tell us brad how is that transaction volume treating you guys these days? From the looks of NAR membership, not so well huh?
http://www.realtor.org/library/library/fg003
By this count brad membership is down to 2005 levels, yet pricing is already down to late 2002 levels. Assuming the realtor headcount mirrors pricing even if things stabilize thats 375k more heads to be cut out of the profession.
Until we reach equilibrium its a lot of grabbing an an ever shrinking pie, is it brad?
I HAVE BEEN IN THE BUILDING; IN FACT IN THE MODELS AND IN ONE OF THE PENTHOUSES..TALK ABOUT GIVING ONE CLAUSTROPHOBIA! THE PENTHOUSE UNIT IS MUCH TOO SMALL EXCEPT FOR THE TERRACE; BUT MY GOSH WHAT HAPPENS ON ALL THOSE WINDY DAYS? ALL THAT DUST BLOWING AROUND.AND ALL THAT DRY AIR SUCKING THE LIFE OUT OF YOUR PLANTINGS! sure, WATER THEM; BUT WHAT HAPPENS AFTER A WHILE TO THE TENANTS BELOW YOU WHEN LEAKS HAPPEN! (AND THEN YOUR LOOKING INTO ROOF LINES.)… THE ROOMS ARE MUCH TOO SMALL AND YOU FEEL LIKE YOU ARE STILL IN AN OFFICE BUILDING! NO MATTER HOW MUCH YOU TRY TO MAKE IT DISTINCTLY RESIDENTIAL IT WILL ALWAYS HAVE THAT “UGH” FEELING; THAT ATMOSPHERE OF BEING INSIDE AN OFFICE BUILDING..
Why is your name in lower case but everything you just typed in CAPS. No need to shout, man…
#
Bob on May 12th, 2009 at 8:32 am
LOL these flippers are toast. That being said, I think 250k for a 1/1 with parking at this address is indeed a deal.
The people buying this likely don’t care about the view: they’re paying for the address. And at 250k I don’t think they’re overpaying.
Listing says parking is sold separate.
“Note to self: Base all financial decisions off Brad. ”
From his posts on here I’ve long suspected brad is “in the biz”. Tell us brad how is that transaction volume treating you guys these days? From the looks of NAR membership, not so well huh?
————————————————————-
Bob,
If I was in the biz and was thinking about a big project, I would expect to make a large profit. It’s a large, multi-year, capital-intensive, high-risk deal. If the most I could expect was a 5% return, I think I’d go do something else with my money.
Why is it unreasonable for a developer to expect a 30% return?
Tipster,
I never commented on developer margins. In fact I could care less what they make. If I get what I consider is a deal I don’t care if the developer is making 100% markup off of me, its of little to concern from my standpoint. Of course the chance of that happening is extremely low, but I’m not concerned if others make money–I guess thats one side benefit of being selfish 😀
“It’s a large, multi-year, capital-intensive, high-risk deal. If the most I could expect was a 5% return, I think I’d go do something else with my money.
Why is it unreasonable for a developer to expect a 30% return?”
30% return on true equity (i.e., “my money”) seems low for the 2001-2007 period, as equity had been substantially replaced by (cheap) mezz financing.
If they were expecting 30% return on total cost of the project, they were elevating outsized profits over sustainability of their business.
Besides, Bob wasn’t commenting on the 30% profit, but on the “note to self” snark and prievious postings.
Uh, you may wanna have the models professionally staged.
What’s the percentage of units sold in this building? It seems more and more developers are willing to slash the price almost half now…
Hey jeff, how can you say those units are small? After all, the “Master Suite” is 10′ by 11′.
Have you ever been to Japan? Those 791 sq ft residences would easily go for > $1 million, at least in Tokyo.
Everything is relative, I guess.
Yeah everything is relative. For instance if I just got out of prison you’d better believe I’d hook up with the first fat chick that bats an eye at me.
But then again the “everything is relative” argument doesn’t hold much water beyond that. Most people on here didn’t just get out of prison or move from NYC/SF/London/Tokyo/Moscow, so whats your point?
Gravity on Jupiter is like 4x Earth’s and we’d all have muscles like Arnold Schwartzenegger. Everything is relative, lol. Another straw man argument in an attempt to justify insane local pricing.
I’m going to go with drsteve had the sarcasm filter on, Bob. But you do bring up a point I’ve been meaning to ask you & homedelete: a lot of properties seem to be overpriced to the both of you and I’m curious as to what general price bands you consider average pricing. Not super steal or or horribly over priced? General areas are fine – not looking to get your impression on the floor by floor pricing market (shot at a previous thread).
I don’t ask for work without performing some myself:
I think 2/2’s downtown in new buildings, normal finishes, ~1300 ft go for 450-500k.
Lincoln Park – 400-450k. Lakeview similar closer to the lake, dropping to mid 3’s by ashland and beyond.
Wicker similar to lakeview, except distance from six corners dictates price.
So when a 2/2 comes along at 50k+ in any of those ranges I get the same feelings of insane pricing.
I don’t think there exists a natural law that all properties should sell at X year pricing but I do put a lot of credence into the lending rule changes, downpayment & risk check changes to limiting supply of qualified buyers which eventually depresses prices.
I think 2/2’s downtown in new buildings, normal finishes, ~1300 ft go for $300k-$350k – downtown is way overbuilt in my opinion, south loop will go for even less.
Lincoln Park – 350k to $400k for the nicest units, less for condo conversions Lakeview similar closer to the lake, dropping to mid 2’s by ashland and beyond. Who would pay to live on Ashland?
i agree with you on Wicker park; I think nice sfh’s will go in the $500’s and up; and the older housing stock that needs TLC will be much much cheaper. Right now there’s not a whole lot of land value in fixer uppers because nobody wants to tear down and build new. They’re not really building new homes and there’s no incentive to for a long time.
I think homedelete’s spot on with the downtown 2/2’s. I’ve seen alot of 2/2’s in West Loop, and most of the condos look like they are going for around $325k. They tend to be between 1,000 sq ft and 1,200 sq ft.
HC and homedelete are right on pricing. Properties sell at those price points. wicker, your prices seem to be on the hopeful end.
Wicker,
I agree with HD’s valuations, generally. On the entry level properties as well I think studios in nice neighborhoods should go for 110-150k, 1/1s for 160-200k. In nice neighborhoods with newly done rehab or finishes that is.
I see a lot of 1/1s in LP listed for 250k and I just wonder who is going to drop a quarter million on basically a 1BR apartment with no parking. It just doesn’t add up for me. In fact I even see 1/1s in more marginal neighborhoods being listed for 225-250k and I just laugh at those. Nobody is buying them now that RE appreciation is out of the picture.
Keep in mind that the market is going to be slow for a while because lots of first time home buyers need to adjust to new lending standards and save for downpayments.
I like the pricing that Wicker has posted and think this is where the pricing will hover. Of course you will have a few high and a few low, but I don’t think super low type pricing will ever return. Remember too, if pricing for the finished product is going to be in that range, what type of material could you expect your homes to be constructed with? If anything, pricing for materials only seems to be going upward. Ten years ago, $12k for a basic light rehab on a $175k house was normal, today that price is somewhere between $18-25k…and this is basic materials, nothing fancy that I got used to for a number of years.
To me it is sort of like comparing gas prices now and what they were in the 70’s…up and down depending on world happenings, but over time they just continue to climb even when leaders are telling us they are stable.
As much as I like to have housing affordable to all who can make payments, I do not think they will go to HD’s wish list levels.
“To me it is sort of like comparing gas prices now and what they were in the 70’s…up and down depending on world happenings, but over time they just continue to climb even when leaders are telling us they are stable.”
If you adjust for inflation and gas tax increases, gas is currently cheaper (at ~$2.80/gallon) than it was *before* the ’73 oil embargo.
Wallboard and lumber should be a bit cheaper in the near term, but I’ve noticed that plumbing fixtures (from cheap to mid-fancy) seem to have really gone up in price.
I don’t think these are necessarily wishing list levels, I think they’re based on what people can afford without the marked increased levels of defaults/foreclosures we’re saying today. Two people on the same block with similar houses can have remarkably different mortgage payments. The owner who bought with 20% down in the late 90’s is just cruising along with an affordable payment he could make for months if he lost his job but the owner who bought between 2002-2007 is sometimes paying two to three times as much per month with much less equity. The 2002-2007 buyer can only afford to miss a payment or two before he goes into foreclosure. If the government wants to stem foreclosures and defaults it will have to make prices once again affordable where buyers don’t live paycheck to paycheck to make the mortgage and the occasional job loss doesn’t result in foreclosure.
“I do not think they will go to HD’s wish list levels.”
I’m wary of official inflation stats. Take a closer look at the “basket of goods” they use to calculate the rate – it’s as jerryrigged as the unemployment rate.
Funny that gasoline is no longer included in the inflation statistics.
Check out: http://www.shadowstats.com/ for a different take on the CPI. Also, google hedonics and what it means for the CPI. Orange juice too expensive? Drink water! Gas too expensive? Ride your bike! Meat too expensive? Eat veges! There’s barely any inflation at all and almost always within the governments target range.
“Funny that gasoline is no longer included in the inflation statistics.”
The gov’t expects all of us from the recent prosperity of Ponzi-real estate fueled economics to be driving Bimmer 335d’s these days.
Seriously though RE valuations are going to continue to tank and foreclosures are going to continue to soar until the jobs thing gets fixed. The government claimed March’s job loss of 540k was comparably better than February’s 600k+ number, which it was. Just like being a parapalegic is comparably better than being a quadrapalegic. Its still a disaster with each passing month.
In terms of how the shadow stats apply to me: I didn’t get a raise this year BUT my dollars are going a LOT farther. As I partake in bar specials I can say that my quality of life has gotten commensurably better with the ailing economy. Deflation is obvious to me from the things I consume.
the additional problem with the inflation stats is that they can/do use decreases in prices of (IMO) luxury items like HDTVs and other consumer goods to lower the rate.
the problem there is I can’t eat a TV if I lose my job.
Fine, everybody hates on CPI. Then look at median income.
1972 US median household income = $9,697
2007 US median household income = $50,233
1972 Fed Gas Tax = .04/ gallon
2007 Fed Gas Tax = .184/ gallon
1972 State gas tax ~ .04/gallon (unconfirmed)
2007 State gas tax = .19/ gallon
1972 Sales tax (state + local)
Frickin’ internet ate the rest of my post–must remember not to use (less than/greater than) symbols here.
Any way, on a simple median-income-based PPP (yeah, yeah–show me a similarly simple comparison tool, I’ll use it instead), and accounting for increases in the taxes applied to gas in Chicago, gas is ~25% more expensive right now (at $2.75/gal) than it was in 1972 (when the pump price was ~0.35/gal), rather than the 8x it appears to be.
Regarding underwriting
In my experience (mostly on 200+ unit buildings) most condo developers / converters would underwrite to a minimum of 2 times capital invested (ie. double their money) they would also look for a total “profit” on gross cost of approx 30% but as someone mentioned that varies greatly based on the financing used (in the heyday most developers were putting 5% of capital in max!)
What drives all the returns (even moreso in a conversion) is how fast you absorb (sell) the units, most of the current projects were probably underwritten to have at least 50% of the units being sold in presales and closing shortly after completion of the building with 3-5% of the units a month selling after that, so typical sellout would be 12-18 months. Of course all of the underwriting that the banks/developers assumed on any project still selling units is terribly underwater with about 30 units/month of new construction selling in the entire downtown area, developers are happy to sell 1 unit a month right now. Of course the primary issue is that developers only have 5% into the deal in most cases and banks don’t want to realize their losses so this will just drag out, I am sure if the banks foreclosed on all the underwater condo projects in Chicago right now the prices in Streeterville would collapse. The banks/developers will try to extend the loans so the developers don’t go BK and the banks don’t have to realize losses. It is ironic that the developers who are so underwater don’t really fear the banks foreclosing on them as they know the banks can’t afford to realize a loss or sell units at huge discounts as the lower prices would impair their other assets/loans.
bjb,
Thank you! I am not in the industry like you however I had these same suspicions regarding the banks and developers. Previously I tried to elucidate your position regarding the banks in that they did not want to mark down their MBS portfolios due to correctly pricing their foreclosures to move them. Someone on here jumped in with a bunch of technicalities (servicer vs holders are seperate, etc) to correct me but the scenario is still apparent to me.
Thank you for your inputs on this as I have long suspected it. The banks and developers are playing a game of hold out as long as possible in the hail mary pass hope that the market turns a corner and things are rosy red tomorrow. Even if not its better to liquidate tomorrow vs. today if given the choice.
With all these taxpayer bailouts of the banks we have enabled them indeed and given them this choice (free option). So they will sit and wait. Meanwhile we have 19 million vacant homes and millions of homeless people.
http://www.bloomberg.com/apps/news?pid=20601110&sid=ap.iU9iqfn20
I have never been disgusted and been ashamed to be an American until last fall. It is clear our elected officials are not operating with the goal of maximizing the well being of their populace when we have almost a million homeless people at any given time.
They won’t let the banks fail that need to to reallocate and reprice these assets to maximize well being due to the financial services lobby.
For those comparing statistics… Don’t leave out this little gem when comparing the 70’s to now.
And as for the previous comments about seeking 30% returns. The damn problem is it’s too high of a return for the risk vs comparable investments and will drive too much investment into developing until you have the South Loop.
“The average home size in the US has increased from 1,000 square feet in 1950 to 2,400 square feet today – a 140% increase. The average household square footage per person has increased by 218%.
In 1950, only 1% of homes built had 4 bedrooms or more, but 39% of new homes had at least 4 bedrooms in 2003. We have one fewer person per household, but we’ve added one extra room.”
“The damn problem is it’s too high of a return for the risk vs comparable investments”
It is too high with mezz lending and low equity requirements. It was kinda reasonable when developers needed to have ~30% of *real* equity (still other people’s money, but either from their friends or a big partner (like an Ins Co) who actually rode herd on the project, too).
“they did not want to mark down their MBS portfolios due to correctly pricing their foreclosures”
Dude, it was me that jumped on you. Yes, what you think is going on makes intuitive sense, but it just ain’t how it works. If I knew a decent RMBS primer to refer you to, I would, but MBS is a world where things that “should be” just aren’t. Accept it, man; there’s a reason that even generally smart finance people can get bogged down in MBS–it is often a counter-intuitive morass.
The developer loans are all (basically) construction loans and are **NEVER** securitized (syndicated, yes, sec’tized, no) and thus held on the books. If the banks had required enough equity (mezz loans + actual cash) the banks might be able to foreclose and do something about it. But when the deveoper contributes the land + borrowed cash and extracts a portion of the borrowed money b/c the value of the land exceeds the required equity, and the construction loan winds up being for ~95%+ of actual construction costs, before accounting for interst and tax reserves, the banks are hosed.
Read this:
http://www.amazon.com/Heres-Deal-Buying-Selling-American/dp/0394589998
and remember the old adage “there ain’t nothing new under the sun”
“The developer loans are all (basically) construction loans and are **NEVER** securitized (syndicated, yes, sec’tized, no) and thus held on the books. If the banks had required enough equity (mezz loans + actual cash) the banks might be able to foreclose and do something about it. But when the deveoper contributes the land + borrowed cash and extracts a portion of the borrowed money b/c the value of the land exceeds the required equity, and the construction loan winds up being for ~95%+ of actual construction costs, before accounting for interst and tax reserves, the banks are hosed”
I woulndn’t say never, but this is accurate.
I don’t think you can blame the developer. It doesn’t make much sense to put capital at risk if it needent be.
“I don’t think you can blame the developer. It doesn’t make much sense to put capital at risk if it needent be.”
Oh, I don’t blame the developers–if someone wants to give *me* risk-free capital, I’d take it, too. Altho, by building more and more, they did act like sugar-crazed brats let loose in a candy store. And the banks and (especially) the mezz lenders kept re-stocking the candy.
Was the bank decision making process really that flawed ex-ante? It appears the banks looked around and figured if the market collapses all the other banks are in trouble too and so it doesn’t matter they will get a bailout. In hindsight they were right. So they took on crazy risk to pump up their short term earnings.
Only by letting some of the banks liquidate can we properly incentivize banks in the future to align their behavior in accordance with the longer term risks they are taking on.
“Was the bank decision making process really that flawed ex-ante?”
In short, yes. My view is that the short-circuit was based on two major things–the comp structures and leverage at hedge funds and the reliance on ratings agencies.
Competition with hedge funds (for top employees and “pride” (for lack of a better word)) drove the banks to take on unsustainble (and probably unreasonable) levels of risk. Given the existing compensation structure of the I-Banks (and the I-Banking divisions of commercial banks) once greater risk was acceptable from an internal control perspective, risk was incetivized and sought after.
Reliance on ratings as the ne plus ultra of determining risk was totally mistaken b/c they relied on default stats from a different era of underwriting and lending standards (i.e., from 1999 to 2007–yesterday, when the standards were tighter). Thus, they were doomed from the start to understate future defaults. But, because the lending market had determined that a AAA rating was required, once you got it, you were golden, even tho it meant almost nothing.
Take away (a) Banks competing with hedge funds on comp and leverage and (b) reliance on ratings in lieu of actual internal underwriting and I believe most of the excesses would have been avoided.
“Only by letting some of the banks liquidate can we properly incentivize banks in the future to align their behavior in accordance with the longer term risks they are taking on.”
Oh, and this–we have. Bear Stearns (quasi-)liquidated; WaMu liquidated; Lehman liquidated. That’s 3 of the 25 largest US banks. Liquidation won’t do it alone; they need regulation (direct or indirect) going forward.