The world is in the process of deleveraging, led by my favorite asset class. Lending and borrowing lost normal rationale as greed took over. History is repeating itself in that postbubble crashes are always painful. The bigger the party, the more painful the hangover, and we have yet to fully realize just how extravagant the gala really was.
The credit being extended fueled a "fluff economy" that allowed people to live lifestyles and invest in things they quite simply could not afford. That economy is over, and its long overdue death has taken (and will take) millions of jobs that fed the credit binging and serviced those who spent the fruits of their borrowing. Many more job losses will come as companies cope with the fact that consumers have far less money to trickle out of their pockets. While this will be extremely unpleasant, it is the normal cycle that follows such exuberance.
The legislators in the state of California sadly budgeted government spending based on taxes collected during the boom/fluff times. Last week those same legislators came back for the 2nd time in 6 months to rebalance the state budget. This time they cut spending (again), raised taxes, and are counting on federal funds to fill a $46,000,000,000 gap. Many jobs will be lost, wages will be cut, and for those who can still pay taxes, they will have less money to take home. Note to California's favorite tourist destinations Las Vegas and Hawaii: Your customers will have less money with which to gamble and buy suntan lotion, which does not bode well for your economies…
Unemployment rose more than 3% (from 5.9% to 9.3%) from December 2007 - December 2008 in California. As California is in a state of disarray, that rate will continue to climb for some time.
The repercussions from the massive job losses haven't hit commercial real estate operations nearly as much as I anticipate that it will. Higher vacancies and delinquencies are coming!
What other shoes will drop? Expect ugly solutions from legislators. One of the main targets for tax increases will surely be property owners and we will likely see the re-emergence of the proposal for a split roll to California's Proposition 13. This would make non-owner-occupied properties (rental properties) "reappraisable" instead of the current annual 2% cap on increases. There will be more code enforcement inspections and other ways to tax the rental property owner from municipalities/counties as they look for new schemes to raise revenue. In other words, we will see higher fees from the government to operate.
These are the Chinese symbols for "Crisis." They are also the exact same for "Opportunity." Something to keep in mind in these crazy times!
