Tuesday, March 9, 2010

The Economy After the Real Estate Bubble

I’ve noticed this year a lot of well-informed observers, including economists who should know better, looking at the economy and saying, in effect, “As soon as we can get the banks lending again and the builders building again, the whole economy can come roaring back.”

The truth is, banks are lending. But lending to real estate developers? Why would a bank want to do that? Every week you hear about a bank being sued by an insolvent developer whose projects went spectacularly over budget and failed, and who is seemingly weeks away from bankruptcy. And it’s not just that a lot of real estate developers can’t draw up a budget to save their lives. There’s a reason they’ve been squeezing their budgets in the last five years. It has been getting harder and harder — often just impossible — to get a commercial real estate project’s budget to work out because there is such a glut of commercial real estate already.

The orgy of building that fueled the last sputtering years of the recent expansion was a mistake. There is no reason to imagine that it should come right back. There is no economic imperative to force anyone to keep building office buildings and shopping malls at a loss. It’s entirely possible that there could be a 15-year pause.

I do realize that building has led the U.S. economy out of recessions before. But those recessions were not created a real estate bust. Historically, the sector that causes a bust is almost never the one to lead the economy in the next expansion. Especially now — we can’t wait 15 years for the builders to come back. The expansion has to come from somewhere else.