Oedipus was curious. Hamlet was humble. Romeo was romantic. General Petraeus could keep a secret.
In and of themselves, these are all positive traits that, correctly applied, produced great results.
Oedipus freed the city of Thebes from the Sphinx by using his superior intellect to answer the monster’s riddle. Hamlet was a thoughtful, deferential guy who weighed all angles of an issue before deciding to act. Romeo listened to his heart, privileging emotion over cold, hard logic. And as our nation’s top spy chief, David Petraeus knew how to keep things under his hat.
But taken to the extreme—stress-tested under the most trying circumstances—these virtues can quickly become a vice. Sometimes ignorance is bliss; swift action brings justice; logic keeps you alive; and transparency breeds confidence.
A similar double-edged sword was wielded by the condo industry for years. Fueled by seemingly unending demand, condo developers efficiently and effectively broke ground or converted luxury apartments at breakneck speed. They easily scored high-leverage construction loans, and their buyers all too easily scored high-leverage mortgages, and everybody did their happy dance.
Yet, as Bob Dylan once sang, “If you don’t believe there’s a price for this sweet paradise, remind me to show you the scars.”
When the for-sale charge fell off a cliff, many condo firms ended up falling on that same sword of easy credit. And as you’ll see in our cover story, “Bowed, but Not Broken,” on page 24, as the survivors start the long climb back up that mountain, their scars inform a new approach.
There are a few other double-edged swords that have been sharpening for years now, but only the positive side, the business end, has been shining. Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) were the saving graces of the multifamily industry for the past few years, putting a safety net under values, fueling the transaction market with cheap money, and, in the case of the FHA, enabling developers to break ground throughout the recession.
But with the prospect of housing finance reform looming, you should get while the getting’s good—if you’re not locking in long-term money now, you should have your head examined. Because, as we point out in “The Mortgage the Merrier,” on page 18, the private sector may not be up to the challenge of serving as a reliable proxy.
Part and parcel of that dynamic is our federal monetary policy, which continues to level interest rates into an oasis, a fool’s paradise. The positive side of low interest rates is an easy argument to make. But maybe we should cast a skeptical eye on any operation known as “Twist.”
This artificial compression has thrown into question several tried-and-true formulas indispensable to apartment owners.
For instance, when interest rates rise, rents usually grow, and vice versa. But the past four years have proven the opposite can be true too. And the risk premium has always been a valued metric for buyers, an easy way of calculating the financial merits of a given acquisition. But if the yield on the 10-year Treasury is a main ingredient of that calculus, it throws the entire equation into question, as we point out in “Premium Risks,” on page 30.
All of which is to say that today’s greatest financial virtue—low interest rates—can breed tomorrow’s tragic flaws. We should all be proud of our successes, both as an industry and individually, sure. But don’t break your arm patting yourself on the back: Hubris is a bitch.