Many people in Seattle believed property prices become increasingly unaffordable; the limited flat land and strong job market are often cited as reasons. This contradicts common sense so long as we produce buildings faster than we destroy them.

News from the Puget Sound Business Journal suggests commercial property may become more accessible in 2009:

Commercial mortgages are repaid over five-, seven- or 10-year terms, with balloon payments at the end of the term. If refinancing is unavailable, an owner would be faced with a distress sale or losing the property in foreclosure.
[...]
Many of the CMBS loans issued at the height of the CMBS market in 2004 are five-year, interest-only loans that will come due in 2009, just as 10-year loans issued in 1999 are expiring.
[...]
At least 85 commercial properties — representing $3.1 billion in investment — are classified as either “distressed” or “potentially troubled” in the Seattle area, according to Real Capital Analytics.

Banks will refuse to refinance a property if the owner needs to lease the property at prices no business can afford. The solution is to sell to someone else who can afford lease the property at a lower price.

Property owners will only foreclose on a property when no buyers can afford to pay the price they want. Foreclosure clears the debt and brings the property and money back into commerce at affordable prices (Bankruptcy is good for the same reason).

The core problem today is that prices are unaffordably high for today’s market. Companies cannot stay in business paying them. That is why JPMorgan selectively defaulted on their Seattle leases, why Weyerhaeuser recently froze wages, and why the state government froze wages and cut a few sectors’ budgets.

Businesses need lower prices to stay solvent and avoid laying people off. Lower lease and purchase prices for commercial real estate will make it much easier for someone to grow a current or start a new business and employ people looking for a job.

Many already want a job now, and many more will soon. Unemployment is at a 26 year high and Christmas sales numbers look dismal. Even with enough cash to run for 2 years with no revenue, Microsoft may lay off people next month:

Is the following a list of head-count cuts or expected percent cuts?

3 in omps
9 in stb
12 in msd
7 in devdiv
18 in UA
5 in MSX
Beyond product groups:

Finance is cutting 10% of work force.

Some CRE speculators want the US Treasury and Federal Reserve to bail them out with free credit. Every dollar Bernanke and Paulson direct to an insolvent, over-leveraged Seattle commercial real estate speculator is a dollar out of the pocket of someone who anticipated and prepared for this scenario by saving.

Why should Bernanke, Bush, Paulson, Obama and Murray punish men who wisely saved their income for more affordable prices? Extending a life-line to foolish speculators keeps prices at unaffordable levels. Misallocated resources results.

Let prices fall.

Another bit of silliness amid this deflation is Olympia’s decision to raise the minimum wage:

The minimum wage in Washington will rise to $8.55 an hour on Jan. 1, up from the current $8.07 and it will remain the highest state minimum wage rate in the country.

Raising the minimum wage only protects the living standards of some workers because it forces other workers out of a job. Employers who may have been able to reduces wages to control costs now must lay people off. How did Olympia decide it is better to force employers to lay off workers than pay them a lower wage?

One way or another the number of saved hours of labor required to own these properties will fall. The only difference between Bernanke’s inflationary default and an Austrian’s deflationary one is that: a.) banks profit from inflation since they spend the new money first and b.) inflationary default punishes everyone who uses the currency. Deflationary default punishes only those involved in the poor decisions.

This entry was posted on 2008-12-26 at 3:31 and is filed under Economy, Politics, Washington. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.