KeNo's Housing and Economic Portal: Monday January 18 Housing and Economic stories

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Silicon Valley Bloodbath Leaves Buildings Empty - (www.bloomberg.com) Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents. More than 43 million square feet (4 million square meters) -- the equivalent of 15 Empire State Buildings -- stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group Inc. San Jose, Sunnyvale and Palo Alto have 11 empty office buildings with about 3 million square feet of the best quality space. “There is a bubble bursting in much the same way as the residential market burst,” said Jon Haveman, principal at Beacon Economics, a consulting firm in San Rafael, California. “None of those towers will fill up anytime soon.” Unemployment in the San Jose-Sunnyvale-Santa Clara metro area that includes Silicon Valley was 11.8 percent in November, down from the August record of 12.1 percent, according to California’s Employment Development Department. Applied Materials Inc. and Sun Microsystems Inc. in Santa Clara and Adobe Systems Inc. in San Jose announced more than 5,000 job cuts since October amid falling sales of computer chips, software and equipment. Commercial property foreclosures will at least double in 2010 and job growth won’t return for two years after that, held back by U.S. consumers who are saving more and “getting back in line with sustainable spending habits,”

Taylor Disputes Bernanke on Bubble, Says Low Rates Played Role - (www.bloomberg.com) John Taylor, creator of the so-called Taylor Rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble. “The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta. Taylor, a former Treasury undersecretary, was responding to a speech by Bernanke two days ago, when he said the Fed’s monetary policy after the 2001 recession “appears to have been reasonably appropriate” and that better regulation would have been more effective than higher rates in curbing the boom. Under former Chairman Alan Greenspan, the Fed lowered its benchmark rate to 1.75 percent from 6.5 percent in 2001 and cut it to 1 percent in June 2003. The central bank left the federal funds rate for overnight interbank lending at 1 percent for a year before raising it in quarter-point increments from 2004 to 2006. “It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting. Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

GMAC May Post $10 Billion Annual Loss After U.S. Takes Control - (www.bloomberg.com) GMAC Inc., the auto and home lender that became majority-owned by the U.S. government last week after a third bailout, may post a loss of more than $10 billion for 2009 as more borrowers defaulted on mortgages. GMAC, based in Detroit, said yesterday that it expects to report a fourth-quarter loss of about $5 billion. Both the quarterly and annual losses would be records for the primary lender for General Motors Co. and Chrysler Group LLC dealers. The company received a $3.79 billion infusion from the Treasury Department on Dec. 30. The U.S. earmarked about $13.5 billion for GMAC in two previous capital infusions and now controls a 56 percent stake. If the government converts preferred shares to common equity, it would own more than 70 percent of GMAC, the lender said during a conference call. “I think for the taxpayer it’s going to be a loss,” said Christopher Whalen, managing director of Torrance, California- based Institutional Risk Analytics. “Who is going to buy this? What is the compelling business model that wants us to have this company continue to exist?” The most recent bailout allowed the lender to contribute $2.7 billion of capital to its Residential Capital LLC unit, which had $2 billion in mortgage assets written down in preparation for a sale. GMAC said it considered several options for ResCap, including bankruptcy. It now expects to sell some of the mortgage assets of ResCap, which ranked among the nation’s biggest subprime home lenders in 2006.

Regional Mall Vacancies in U.S. Rise to Record on Unemployment - (www.bloomberg.com) Vacancies at the largest U.S. shopping centers reached a record 8.8 percent in the fourth quarter as unemployment rose and consumers spent less, Reis Inc. said. Vacancies at smaller neighborhood and community centers increased to 10.6 percent, the highest level since 1991, from 8.9 percent a year earlier, New York-based Reis, a real estate research company, said today in a statement. “We expect economic pressures to continue to assail consumers and businesses,” Reis economist Ryan Severino said in the statement. “Although it appears that we have reached the end of the technical recession, continuing high unemployment and inconsistent consumer spending patterns will weigh on retail properties for at least another 18 to 24 months.” About 7.2 million jobs have been lost since the recession began in December 2007, and almost 4.6 million people were collecting extended unemployment benefits in the week ended Nov. 21, according to a Commerce Department report. Retail sales rose 2.3 percent during Christmas week and probably rebounded from 2008’s holiday season, the worst since the International Council of Shopping Centers began statistics four decades ago. Vacancies at the largest malls, known as regional and super-regional centers, rose from 7.1 percent in the fourth quarter of 2008. Asking rents at regional and super-regional malls fell to $39.03 a square foot, the fourth straight quarterly drop and a 3.6 percent plunge from the fourth quarter of 2008. That’s the biggest annual loss in 10 years of research on that sector, Reis said. Rents fell 0.4 percent from the third quarter.

Global Boom Builds for Epic Bust: Peter Boone and Simon Johnson - (www.bloomberg.com) There are three main lessons to be learned from the past year. First, we’ve built a dangerous financial system in Europe and the U.S., and 2009 made it more dangerous. You can bet the bank, and, when the gamble fails, you can still keep your job and most of your wealth. Not only have the remaining major financial institutions asserted and proved that they are too big to fail, but they have also demonstrated that no one in the executive or legislative branches is currently willing to take on their economic and political power. The take-away for the survivors at big banks is clear: We do well in the upturn and even better after financial crises, so why fear a new cycle of excessive risk-taking? Second, emerging markets were star performers during this crisis. Most global growth forecasts made at the end of 2008 exaggerated the slowdown in middle-income countries. To be sure, issues remain in places such as China, Brazil, India and Russia, but their economic policies and financial structures proved surprisingly resilient and their growth prospects now look good. Third, the crisis has exposed serious cracks within the euro zone, but also between the euro zone and the U.K. on one side and Eastern Europe on the other. Core European nations will spend a good part of the next decade bailing out the troubled periphery to avoid a collapse. For many years this will press the European Central Bank to keep policies looser than the Germanic center would prefer.

Greece Faces Credibility Test From EU Athens Swoop - (www.bloomberg.com) reece’s plan to cut the European Union’s widest budget deficit faces a first credibility test today when EU officials arrive in Athens to scrutinize the government’s taxing and spending proposals. The three-day trip by aides to Monetary Commissioner Joaquin Almunia is an unusual step, said an EU official who asked not to be named, underscoring concern about a shortfall estimated at 12.7 percent of gross domestic product last year. Greek bonds plunged in December as the country’s ballooning deficit spooked some investors, fanning speculation that fiscal woes could also engulf Spain, Ireland and other euro region nations. While Prime Minister George Papandreou has pledged to cut the deficit below the EU’s 3 percent limit by 2012, he’s struggling to convince economists he will follow through. Cutting spending is “very difficult in Greece because you know that once the government tries to do that you very often get riots and people rising in the streets,” Philippe Gijsels, a strategist at Fortis Global Markets, said. “But it’s clear that they will have to tighten their belts and come up with a budget that’s believable by the rest of the world.”