Suncoast Business Forum; John Tuccillo

Oh. So. This special presentation was produced in high definition by W. edu Tampa St. Petersburg Sarasota. How did the American dream of owning your own home turn into an economic nightmare and a global recession. With all the brainpower on Wall Street and around the clock. Business news. Had we missed this financial train wreck as it headed our way. These are among the questions will be posing one of the foremost will sit in the midst of the United States. Next. The Suncoast with us. There's no one exactly like you. No one has the same financial goals or cares about the same people. That's why Raymond James Financial Advisors have to be independent from the biased advice that's right. And that's why we pioneered the idea of financial planning. You might say we're just.

Individual solutions from independent advisors. Florida is feeling the impact of this recession worse than most other regions. Real estate foreclosures are higher so the unemployment rate and real estate values are falling faster. The big question is how much worse would get before things turn around. Real estate economist John to solo has seen several booms and busts during his career prior to form a consulting firm. He was chief economist for the National Association of Realtors. John welcome to the Suncoast business form. Thank you Jeff thanks for having me. You know there are some folks who've been comparing what we're in now to the Great Depression of the 1930s. Others are saying it's not quite that bad it's more like 1980s from your

perspective what how would you perceive this recession we're in. Well it's not the second coming of the great flood and it's not the second coming the Great Depression. It's just a rip roaring recession. It's deep it's going to be long. But you know why it's not terribly outside the average that we've seen in the post-war period. I think what makes this feel worse to us is that it hasn't been since the Great Depression that we simultaneously had a recession of this magnitude and such an erosion of wealth of this magnitude. When you put two together people really feel the pain so this feels worse than it actually is. Now we're seeing world leaders get involved in this and this is a recession is not only confined to our borders. This is really spreading all around the world. What does this say about the nature of the recession and what does it say about the nature of our economy and how things have changed. Well I think that clearly the global economy is both working against and for us it's working against us in the sense that there isn't any bail out economy out there.

Everything so integrated that people are moving in the same direction the same time it's working for us in the sense that we can do the massive stimulus we've had and we can borrow that money from other nations notably China which have surplus savings rates in when that happens. That's a help to us. So it cuts both ways really but we are much more globalized and we're much more interdependent. Well how big a challenge do you think it is to get global leaders to work together because part of the solution seems to be to get more global cooperation countries and central banks moving in the same direction. Well how feasible is that if it was all economics to be easy. But it's culture. Let me give you one example. The Germans are imposing massive amounts of stimulus. They feel that that will lead to inflation later on and they have a case. But culturally they're in there deep in the in the in the national psyche is the memory of the Weimer Republic and the massive hyperinflation occurred in the in the 30s in the 20s and 30s. And they're saying themselves we can't

repeat that again. So you always fight the last war. You're always you always dread the last economic event. So that's the case in Germany they're not exactly on the same page. They're not in in essence everyone has their own kind of preference etc. etc.. One of the other things of course is that to the extent that the world is interdependent the more the US the less the Europeans have to do because there is that over wash. And what they're hoping is that our economy turns around quickly because of what we're doing. So they will have to do as much. What do you think the U.S. role will be in the global economy once all the dust settles. Well that's unclear I think the kinds of scare stories we hear about the. Dollar being taken away as a reserve currency that the U.S. taking a second position to change all these kinds of things. I think they're overstated. I think the United States is still the largest single economy in the world. Europe is not sufficiently unified to challenge even though in aggregate it is bigger but the United States

is the biggest single economy the world. And we pretty much set the tone for what goes on in the world. So I think we still will be the leading economy after we come through this. Of course it doesn't hurt that status is not hurt by the fact that everyone's going through the same same problem. If there were large economies out there let's say Europe was not undergoing recession it would be a very different picture. But everyone's in recession so the pecking order remains the same. For years it's been the policy in the United States to cut taxes and to remove regulation. The idea that this would be the way to stimulate the economy. Has this been part of the problem did we kind of sow the seeds for this by these policies. I think the taxation the tax cuts yes the deregulation No. And let me explain that. What we did in the United States with the tax cuts that occurred in the early part of this century was redistribute wealth and redistribute income. If you take a look at real income numbers the entire gain a real income from 2000 to 2006 went to the top 10 percent of income earners. The bottom

90 percent actually percent actually lost ground in real terms they lost about 7 percent purchasing power. Now that was hidden by the fact that house values are going up and people were able to sustain their consumption by taking out home equity loans withdrawing equity from their homes essentially. But but those tax cuts really set up the situation we have now where people are scrambling to to basically survive the regulation piece was not really that big a problem we still had enough regulation in place. The problem was it wasn't forced. And I use the Bernie made off case which in the whole scheme of things is really noticeable but not significant. It's big but it's not huge. I made off was targeted several times to the FCC which passed on taking up his case. The regulations were in place. Bernie made off could have been dealt with early in the process but he wasn't because the FCC was not

enforcing the regulations that were in place so it wasn't deregulation. It was lack of a lack of interest on the part of the regulators. Now obviously that's going to change because we will see much more regulation coming down the pike now. Some of the Be good and some will be bad. I think that under the circumstances we're probably going to over react with respect to regulation but that's because the people who were in charge of watching the hen house let the fox in. Well this seems to be a great call from around the world for greater regulation particularly the financial services industry. Is this going to become an impediment on the smooth and efficient operations economy. Yeah clearly there are European calls for a world regulatory body which will take care of financial institutions. I don't think that's going to happen. I don't believe that there's a group of eight or the Group of 20 which everyone I deal with is going to get it together enough to do that. OK. I also believe that if that regulation is not going to be effective in the long term because let's face it Wall Street is smarter than Washington.

They pay more they get better brains and they'll always find the loophole in regulation that's how the derivatives thing start. There's a loophole in regulations and they'll always be something that's not covered. Wall Street will find it. They will develop it. So after we forget what we've been through here and after things get back to quote unquote normal Wall Street will invent something else and will be on our merry way again in the cyclical game between the regulators and the regulated will just continue. Now trillions of dollars are being pumped into the economy over the last several months alone and not only here but all around the world. Is the amount of money that's being focused on this problem enough and how do we know that we don't. We don't know if it's enough. We don't know if we've put sufficient mass into play so the economy can heal itself. And the only way we'll know is by observing what happens. Unfortunately since these things take

time we probably won't know until it's too late that we've either overshot or under shot. I think the approach that I like here. There are a lot of things I don't like about what's going on in Washington but one of things I do like is the approach is being taken is very pragmatic let's try something and if it doesn't work we'll try something else. But let's do something. This is really a mirror of what Franklin Roosevelt did during his first hundred days it was Let's throw stuff against the wall. What sticks we keep what slides down the bottom we replace. And I think that's really what we're going to be dealing with here over the next six months to a year. Now once this all plays out there's there's a great deal of concern that will over stimulate the economy that this is an unprecedented amount of stimulus that we're applying what happens if it is too much. Well I think I don't think there's any doubt that it is too much. I mean we just flooded this economy with liquidity. And we've we've we've put so much stimulus in the economy. Now when I say it's too much I mean ultimately it's too much. Some of the stimulus

is is well structured in the sense that it ends like the grants to state local governments for infrastructure projects. That ends that that's not a recurring thing. Some of this stuff is embedded deeply in the economy like the feds. Now two trillion dollars worth of liquidity that's got to get that out of the economy because this economy's going to recover when it recovers that money has to come out as inflation unless it's sucked out. So what the Fed's got to do it's got to decide within the next six months when it has to start withdrawing liquidity from the economy if it oh if it misses that mark by too much we will have significantly higher inflation because we want to get out of this recession. The Fed will miss the mark. So we will see more inflation. We will see higher interest rates. But if it just misses by a little it will be fine. If it misses it by a lot we're on a pendulum swing and then we have to deal with with higher inflation. It's a real juggling act the whole it is an incredibly delicate line to walk

and it takes incredible amounts of research of information of timing and deft management of the economy. It's a lot easier on the fiscal side because as I said a lot of these things are non-recurring expenditures. It's a lot easier on the fiscal side but there's still a challenge there. But the monetary side is you know you've got to give the Fed tremendous credit because even if they do a bad job they're doing an incredibly tough job. Well now at certain points in this crisis it appears that we're on the verge of a financial meltdown and that the financial institutions both here and in other parts of the world were going to simply collapse. Do you think we've dodged that bullet at this point. No I don't. I I I think we're OK we're on the right path but there's still danger out there in. We've got to figure out the extent to which bad assets are being held by financial institutions around the world. We have got our hands around that yet. The approach is you know you look at this is

kind of a series of approaches as I said the pragmatic approach to policy the approaches appear to be getting better but I still don't think we've got our arms around it. Now there's a lot of forbearance going on out there and there's a lot more trust in the system than there was four months ago. And that's what's that's what's holding it together. But I'm not sure we've got the right solution yet. Well the government recently announced a plan to try and get some of these toxic assets off the balance sheets of the banks. How did real estate and real estate mortgages become so toxic. It's a long story. What happened basically was was was a simultaneous move in the housing market financial markets and what deal to financial markets first in the financial markets. There was a lot of loose money which had been liberated from the stock market or had been built up by oil producers which is out there. Right. And it's looking for a home. And the essence of

capitalism is money looking for investment. It's looking for a home. And it starts fixing on the housing market because the housing market's looking good and there's a tremendous demand for mortgage backed securities. To meet that demand you have to have a lot of mortgages in the pipeline. Now let's shift over to the housing sector. So what happens now is that lenders seen that they could package mortgages ship them out and make a profit on the packaging. Decide Well let's get more people into houses and all of a sudden they're inventing instruments which basically qualify if you could fog a mirror in qualifies you for things beyond your wildest dreams. So what happens then is you've got people who have overreached in taking out mortgages the mortgages are already packaged divided up put into securities and shipped out to investors and now what happens when when these guys over here start having trouble meeting the meeting the mortgage loans

because their arms reprice what have you. All of a sudden the underlying securities start going bad. And that's how the process begins picks up momentum as the housing market turns down because prices were outrageous. It's amplified by the creation of derivatives which now leverage one mortgage 30 times in the security side in any just just steamrolls as they get a snowball rolling downhill and that's that's kind of what happened. Right. And what look like great investments and it up being spread all around the world to investors all around the world and therefore have a global recession. Well they were traditionally very good investments. But what happened was that because they were traditionally very good investments investors assume they still were the same but they were fundamentally different. They were now risky investments and investors didn't do their due diligence and then on top of that they relied on guarantees from companies like AIG who didn't realize that insuring your car is fundamentally different from insuring a default credit swap.

And all of a sudden you know you have false confidence. You have people not doing their due diligence with respect to risk and they're buying assets that are much riskier than they ever thought. Now moving from global scene to Florida in recent years Florida's economy actually didn't suffer as greatly during periods of recession but in this time it is different. Florida's recession is deeper. The real estate recession is harsher. What does this say about the nature of this particular recession and perhaps this region's economy. Well I think that you want to look at this from two sides and supply side manse side. On the demand side the floor has always benefited from large migration inflow in the early part of this century we were welcoming 190000 new people per year. That's a huge number. All right. If you look at it that's what half of the half of the Tampa or three times a Sarasota all of a sudden you've got a lot of people moving into the state in that their tails off.

That has tailed off. And you look at migration numbers now they're nowhere near that. They're marginally positive. And in fact if you if you take everything south of I-4 they're actually negative. Well what's coming into the state is staying north of I-4. So I think I think that's that's the demand side on the supply side. You had just a lot of land and a lot of builders put sticks in the ground. You know the net of it is that in many many of the metropolitan areas in Florida South Florida in many of those metropolitan areas you now have inventory overhangs and housing. And so this thing intensifies housing creates jobs not only construction jobs it also creates jobs for people who sell furniture. It creates jobs for landscapers. It creates jobs et cetera et cetera et cetera so when the housing market slips you get that job creation down and that dissuades people from moving here if they are not the you know the classic retirees if there are people coming here looking for jobs they don't come here anymore. And and

that's that's a downward spiral and because the housing problem was so big in South Florida it's deep in the recession. And that's where we are. Is it going to take a turnaround in the job picture for this to turn around in Florida. Well chicken and the egg phenomenon. Yeah it is about jobs. I'll tell you right now that in most of the markets in southwest Florida real estate is getting better. OK. Now a lot of the sale or short sales or other kinds of distressed properties. But as a sales a sale. And people move into the house are still going to spend money. So that's going to stimulate the economy. So we are seeing movement in the housing market here. It's not it's not nearly as bad as used to be as matter of fact I would probably even say if it weren't for the recession it would be moving up very smartly. The problem is that unless you can get jobs to come back and begin speaking nationally as well as Florida English good jobs come back you're not going to get the economy to come back in the

March numbers which were six hundred sixty five thousand jobs lost in the United States were really disappointing. We need that to get less bad each month. And then we'll see it. And the problem here in Florida has got it's got to follow the same pattern you need jobs you don't have jobs the economy is not going to go now during the past couple years that the median home price in the Tampa Bay area according to one survey has actually dropped nearly 50 percent to half over to an after year period of time which is greater than the national average. One survey that came out just a week or so ago said that we're not at the bottom on home prices in this area. What are your thoughts about those numbers and where we're headed. Well I think you know we're not at the bottom but we're not that far away. And I'll tell you why. One of the things that always happens in the housing market prices always follow sales. Prices keep going up even if your sales are turned down. That's what happened in 2005 and 6 and prices keep going

down even if your sales have turned up which is a lot of what's happening now. And my view is that we're probably in terms of the price cycle three six months away and there's not much left. I mean it's it's going to tail off and begin to turn up within the next three to six months because that's where sales are going and sales will pull prices with them. Now if you look at sort of trend lines for for this area. We went way above trend line back in 2003 4 and 5. We're now well below it. And if the trend had continued the median price would be higher than it is now. That's gotta catch up. I mean historical averages will always win out. And what's going to happen is that we're gradually going to moving back to that 67 percent trend line growth for prices. But I think that has to happen only after sales have clearly turned up and I think that's a three to six month process. Now we know that residential real estate has been devastated by this recession has the same been

true of commercial or commercial better off commercial slightly better off. It didn't have the huge construction boom it didn't have the huge price run up. Where construction where part of your commercial real estate is different is really in two ways number one is there is clearly a bigger gap between classy buildings and everything else that's growing. And number two as most commercial leases have shrunk where they were once five there were three if they're three they're one. So so what's happening is that owners of commercial buildings are not locking in for long periods of time. Understanding this is the bottom of the cycle. You don't want to lock yourself into the cheapest cheapest rent. The third thing I'll mention is is that as part of this bailout. The government went back and included student loans car loans and small business loans which they excluded or omitted. The first time around the small business loans are going to help maintain or create businesses that will fill in the large number

one story strip kind of spaces that we have a lot of here in the Tampa Bay area and I think that will be a positive it's not going to be huge but it will be a positive for keeping that type of commercial real estate occupied. Now we're are seeing a lot of foreclosures and a lot of short sells a lot of the faults are the government programs out there and the bank remediation programs that are that are being attempted are they making a difference. Oh yeah. They're better than they were they didn't exist four months ago. I mean banks had no clue. Right now they've got a clue the government's prodding them. You know you gotta remember when the initial bailout was passed in the summer of 2008 it was a sense of Congress that part of those funds should be used to prevent people from being foreclosed. Treasury never did that. But now Congress went back and said you will do that and this will happen. And in addition banks have begun to institute their own remediation programs voluntarily under coercion. It doesn't matter. They're

doing it. And one other interesting thing which I think we need to point out. Right now there are a lot of companies around the country. Private companies on their own who are four who are offering forbearance insurance to purchasers. The automobile companies are doing now a lot of real estate companies are doing now. So if you buy a house through me or if you buy a car through me and you lose your job I will provide up to you know say six months of payments for it. I'll forebear up to six months of payments. It's very interesting that this is exactly the kind of social net net which exists in European countries and which is just scathingly denounced by American politicians who also happen to be upholding the glories of private capitalism. What does private capitalism do. It replicates those social networks so there must be something in it anyway that's also happening. And so what we're getting is a lot more cooperation from the private sector in terms of trying to help people out until things get better.

Now diversity for some creates opportunity for others. Sure. Do you see opportunities for investment in in the residential market in the commercial market and perhaps in the mortgage market. Probably the best situated households in the United States right now. Are people who would like to become owner owners but are not owners. If you're a first time buyer you're facing a market where mortgage rates are as low as they've been since 1950. You're facing a market where prices have been discounted dramatically and you get $8000 tax credit. You can't ask for a better configuration of of events than that so your first time home buyer you are sitting in the catbird seat as far as other people are concerned. If you look at where median prices are now in the Tampa Bay area and you look at that 6 to 7 percent trendline historical trend line. There is a lot of space there for for those prices to come up. If you are someone who

has a five year horizon plus in deep pockets there are enormous investment opportunities in real estate right now. Now you know I feel uncomfortable saying it because you know I used to work for the realtors and and I was always accused of sort of shilling for them. You know I don't think I ever did. So I'm still uncomfortable saying that but I've never I truly believe that now and I think this is one of those few historical periods where you can really invest in real estate and look to make a profit. Now as far as development is concerned what you need to look for is how to create spaces commercial spaces which are cutting edge in terms of technology places which have the complete communications package which are open to improvements in communication and can offer tenants. Just everything they need for doing business now and into the future. I mean that's an opportunity.

John I'd like to thank you for being our guest today. My pleasure Jeff. If you'd like more information about the Suncoast blues form or if you'd like to see this for other programs again you can go to our website at W edu dot org slash SPF. Thanks for joining us for the Suncoast business for. Us.