By P. JACOB YADEGAR
In Los Angeles County, numerous residential condominium projects are now being marketed as apartments as developers scramble not only to find interested buyers but ones who can qualify for a mortgage.
Developer Fred Afari, who converted the Chapman building in downtown Los Angeles into 163 condo units for sale, has switched the project to a rental building because of changing market conditions.
Tighter lending guidelines and a substantial contraction in the money supply are helping fuel the current real estate crisis. Regardless of the property type, borrowers are having difficulty securing financing.
With the severely tightened restrictions and the unhealthy balance sheets of most lenders, liquidity continues to be a major driving force of the continued deterioration. Although the Federal Reserve has reduced rates dramatically over the last six months, lenders are still reluctant to lend, as they are under heavy pressure from regulatory agencies to clean up their delinquent and nonperforming loans.
Federal regulators that conduct audits of the banks and lenders are increasingly agitated with the level of risk in the lenders’ balance sheets. While the Federal Reserve advertises and promotes the lowering of interest rates to assist the economy, it continues to restrict the lenders’ ability to lend.
Most recently, several well-known local lenders have either entirely pulled out of the market or have massively cut back by tightening their guidelines to levels that very few borrowers can meet.
In addition, a lot of nontraditional lending sources have completely dried up. The flow of readily available cash from Wall Street firms which accounted for a very large part of the real estate lending market has all but disappeared. Billions of dollars have been taken out of circulation as a result of the failure of Wall Street firms to manage their risk.
Continued losses in the tens of billions are still being reported by the largest financial institutions, insurance companies, banks and lenders. As a result, the contraction in the overall money supply is starting to take a severe toll on the real estate market and the consumer.
Like the “busted” condo projects, many residential developments, commercial projects and retail centers are having difficulty in securing the necessary financing to keep the projects afloat. Downtown Los Angeles has seen several large projects delayed, put on indefinite hold or scrapped in their entirety as a result of the current liquidity crisis.
The current turn-down is proving to be unbiased and nondiscriminating, as the effects are being felt by people of all financial backgrounds. Both consumers and major developers are reeling to make ends meet, and contrary to what many believe to be a “bottoming out,” the lack of liquidity in the market leads me to believe that we have yet to hit bottom.
Short on reserves
Historically, consumers and sophisticated professionals have an average of six months of reserves to help in weathering storms. The current liquidity crisis has entered its third quarter and many who have been able to hold on until now are starting to feel its effects.
Consumers are being asked to pay more than $4 per gallon for gasoline, which in a transportation-heavy city like Los Angeles is a very difficult burden and drain on their cash flow. In addition to the higher gas prices, consumers are feeling the pinch of higher food prices. All of this coupled with the lack of liquidity will lead to a dramatic decline in consumer spending.
While tough times are still ahead, there are some bright spots in the local economy. Los Angeles is becoming more recognized as a metropolitan city of the world. With the weakness in the dollar, foreign investment in Los Angeles continues to soar as real estate prices in Los Angeles are still considered to be some of the lowest in the world compared with other cities like London, Tokyo and Paris.
Additionally, exports to the Far East continue to climb, and aid in boosting the local economy and local businesses. The diversified business base has also been a tremendous boost to the local economy as the film and production industry, defense, import-export and manufacturing sectors continue to help sustain the underlying economy and jobs.
Now more than ever, cash is king and those who have saved up for difficult times will have an easier time working their way through this muddled economy as we continue on the downward cycle for the foreseeable future.
P. Jacob Yadegar is founder and chief executive of Empyrean Funding, a Los Angeles mortgage company specializing in residential and commercial loans.
