A better way to anticipate downturns

Credit markets, though harder to follow than equity markets, provide clearer signs of looming economic decline.

McKinsey Quarterly
OCTOBER 2010 • Tim Koller
Source: Corporate Finance Practice



What executive isn’t challenged by the daily barrage of conflicting economic reports attempting to clarify the question of the hour: will the global recovery build or lapse into another recession? Indeed, executives around the world are evenly split on the topic.¹ And while the savviest executives and investors know better than to get caught up in the short-term fluctuations of the economy, many others, looking for evidence of longer-term trends, still fixate on movements in the equity markets.
They shouldn’t. The fact is that those markets, … don’t predict downturns effectively. Credit markets are a better place to look for signs of impending trouble, in no small part because they have been at the core of most financial crises and recessions for hundreds of years. Parsing the credit markets isn’t easy—there’s no single number remotely like a share price to monitor, and there are many moving parts. But for executives willing to take the time to understand the relationship between the financial and real economies, the credit markets can provide clearer indicators that a recession is on the horizon.

Collective wisdom falls short

Subscribers to the theory that markets process all information efficiently would argue that equity investors should be in very good shape to recognize early indications of a looming downturn. If that were indeed the case, current market valuations might inspire confidence. … And since equity markets do a reasonably good job of tracking long-term economic fundamentals,² investors can expect longer-term returns—dividends and share price appreciation—that are in line with historical real returns, in the range of 6 to 7 percent.
Of course, the fact that the stock market is currently in line with the long-term trend doesn’t rule out the possibility of major fluctuations on the way to the longer term. The performance of equity markets shows that they have not been a good predictor of past recessions. Indeed, during every major recession since the early 1970s, most of the decline in the S&P 500 index occurred after the economy had already slowed (Exhibit 1). … Our analysis suggests that the equity markets give too much weight to current economic activity rather than to the situation likely to materialize in a couple of months or even a year.

Exhibit 1: Most of the decline in equity markets comes after a recession has already begun.

Moreover, when the index’s value does drop during nonrecessionary periods, this rarely signals a coming downturn. In the past 30 years, there have been few major declines in the market outside of recessions (Exhibit 2). Even an extreme case, such as the 20 percent drop during a couple of days in 1987, didn’t portend a systemic downturn, and the index was back to normal a mere two months later. In the past, such market fluctuations have been caused mostly by forces that didn’t have anything to do with the real economy—and any effect they had dissipated very quickly. Equity markets played the more typical role of bystander, buffeted by and reacting to economic events rather than anticipating them.

Exhibit 2: Stock market declines do not indicate economic downturns.

While the equity markets may not predict economic trends well, their depth does provide investors with liquidity, so they generally continue to function smoothly even in difficult times. … During that time, the S&P 500’s long-term trend value—the value you would expect to see if you were confident that the economy would recover to its long-term trend within several years—stood at about 1,100–1,300. Therefore, no one should have been surprised to see a drop to the 900–1,000 level, given uncertainty about the depth and duration of the recession. …

Incubators of crisis

Unlike equity markets, credit markets don’t always function smoothly during difficult times. That, in part, is why they are a better source of clues about where the economy is heading. The credit markets are where crises develop—and then filter through to the real economy and drive downturns in the equity markets. Indeed, some sort of credit crisis has driven most major downturns over the past 30 to 40 years (Exhibit 3). Such crises include not only the recent property debacle in the United States and the 1990 one in Japan but also the crises generated by excessive government borrowing in Latin America in 1980 and by excessive corporate borrowing in Southeast Asia in 1997. So executives who find reasons for optimism in today’s equity market levels might be less sanguine looking at today’s credit markets. It’s still not clear whether prices have stabilized in once overheated real-estate markets. Banks are still somewhat vulnerable. And the level of government debt in the United States and elsewhere is still an issue.

Exhibit 3: Most major downturns in the past 30 to 40 years have been driven by some sort of credit crisis.

Moreover, the pattern of crisis development shows clearly enough that the one thing we can know for certain is that economic crises will erupt in the future—in part because the credit markets work almost as if designed to cause them. That may be a provocative point, but consider this:

• The credit markets are extremely illiquid. The trading volume of most equities is many orders of magnitude greater than that of typical debt instruments. … This illiquidity sometimes makes it difficult for banks or other investors to sell credit assets at a reasonable price. In addition, providers of short-term credit—to banks, hedge funds, and other financial institutions—may be simply unwilling to extend new credit when old debt comes due, forcing debtors to sell assets to pay down debt just as they are least sellable.
• The banking system and many investors, particularly hedge funds, earn a significant portion of their profits on the mismatch between their assets and liabilities: they invest in longer-term loans and other investments and borrow with short-term deposits and debt. … Normally, this formula works well. But two things can happen to disrupt it. Sometimes the yield curve inverts, with short-term interest rates higher than long-term rates; then, normal banking profits disappear. More important, short-term credit markets sometimes freeze up, so banks, hedge funds, or financial institutions can’t get short-term debt at a reasonable price, or any price. As a result, they sell assets at distressed prices—if they can find buyers.
• The system suffers from chronic group-think. … Banks and investors observe which banks or other investors seem to be making the highest profits and then implement similar strategies. If contrarians in the market were to counterbalance credit excesses, the system should stay in equilibrium. But the system makes it very difficult for investors with contrarian views to apply them. …
• Expectations of government bailouts create tremendous moral hazard—… If the European Union hadn’t been expected to step in and rescue the country, the spreads on its debt would have been much higher, years before the crisis hit, relative to, say, German bonds or other euro bonds, given the enormous levels of government debt and its large social obligations. Instead, investors assumed that the EU or one of its members would bail out Greece and continued to lend to it at rates far below levels that would have reflected the true risk of the debt. And in the end they were right, as the EU stepped in.

Unfortunately, it takes several years for crises to develop, and once the conditions are in place, they are nearly inevitable. The only way to stop one is to anticipate it years in advance; for example, preventing the US subprime crisis would have required clamping down on borrowing in 2005. Avoiding the crisis in Greece would have required something similar in 2005, 2006, or even earlier.

Foreshadowing a downturn

The good news, relatively speaking, for managers of companies is that because the conditions for a crisis are in place several years in advance, it is possible to see the signs of one coming—and to avoid getting caught up in credit market hazards.³

Loose lending standards

One clear sign of trouble ahead is a deterioration of lending criteria. … [During] the 2005 real-estate bubble in the United States, buyers with little or no evidence of their ability to carry a mortgage could purchase houses.

Unusually high leverage

Another warning sign of crisis is unusually high debt levels and mismatches between assets and liabilities, whether by financial institutions, companies, governments, or individuals. For example, in the months leading up to the real-estate crisis that erupted in 2007, the leverage of both banks and consumers in the United States was at unusually high levels. In addition, many consumers were financing their homes—long-term, illiquid assets—with debt in the form of adjustable-rate mortgages that had the characteristics of short-term debt.
In the 1997 Asian crisis, companies financed production facilities—obviously long-term investments—with debt in US dollars. When the dollar strengthened, borrowers needed more local currency cash flows to service the debt. And as hedge funds have grown over the past decade, the importance to their returns of their financing model—short-term debt to finance less liquid assets at very high leverage levels of 90 percent or more—has largely been left unspoken. The general public couldn’t see how leveraged these funds were, but the banks lending to them could. And even with full access to their balance sheets, no single bank was willing to give up the business as long as the hedge funds were profitable customers.

Transactions without value

It isn’t always easy for casual observers to notice, but subtle signs often indicate that financial transactions are proliferating even when they aren’t creating value (for example, by substantially easing the allocation of capital). Indeed, many collateralized debt obligations, such as those blamed for the great credit crisis that resulted in the demise of Lehman Brothers two years ago, fall into this category. … Whenever a company tries to take debt off its balance sheet, investors would be well advised to wonder why. These transactions generate a lot of fees for bankers but rarely create any value.
Watching the equity markets for signs of future crises or downturns is unlikely to provide the kind of advance notice that can inform strategic decisions. Executives with the tenacity to follow the many moving parts of the credit markets are likely to be better prepared when the economy does turn sour.

About the Author

Tim Koller is a principal in McKinsey’s New York office.

Notes

¹ “Economic Conditions Snapshot, September 2010: McKinsey Global Survey results,” mckinseyquarterly.com, September 2010.
² See Richard Dobbs, Bill Huyett, and Tim Koller, Value: The Four Cornerstones of Corporate Finance, Hoboken, NJ: Wiley, November 2010.
³ Indeed, US industrial companies that entered the crisis with healthy balance sheets were able to withstand the crisis reasonably well, precisely because they were not overleveraged and had sufficient cash reserves to be flexible as the crisis wore on.

Related articles

• First The Equity Markets Blew Up, Then The Credit Markets And Next Is The Political System (businessinsider.com)
• If the Dollar Stops Falling, the Stock Rally Could Be Over (dailyfinance.com)
• Joseph Stiglitz sees bleak future for euro as New Malaise takes hold (telegraph.co.uk)

Congress restores incentives to make SBA loans more attractive

Memphis Business Journal

Memphis Business Journal - by Kent Hoover

Congress … restored incentives that made Small Business Administration loans more attractive for borrowers and lenders.
The $636 billion defense bill that was signed into law Dec. 21 includes $125 million for the SBA, which the agency will use to increase the government guarantee on its flagship 7(a) loans to 90%. The funds also will enable the SBA to eliminate fees for borrowers on its 7(a) loans and 504 loans, which primarily finance real estate. This will return the guarantee and fees to where they were before Nov. 23, when the SBA ran out of the economic stimulus funds that enabled the agency to make these enhancements.
The new funding, however, is expected to last only through Feb. 28, 2010. The House, in a separate jobs bill, appropriated $354 million to keep the higher guarantee and lower fees in place through Sept. 30, 2010. That extension awaits Senate approval.
“We’re hopeful that it gets done,” said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders.
…The SBA “needs to be stepping up and filling that void,” [Wilkinson] said. Given the constraints on bank lending, “this is pretty much the only game in town.”
The SBA’s normal guarantee on 7(a) loans ranges from 75% to 85%, depending on the size of the loan. The higher guarantee made SBA loans even less risky for lenders, and the fee reductions made the loans more affordable.
“These changes proved very effective at jump-starting small business lending, and the need to continue them is clear,” said Sen. Mary Landrieu, D-La., who chairs the Senate Small Business and Entrepreneurship Committee.
…The SBA set up a waiting list for borrowers and lenders who wanted loans with a higher guarantee or reduced fees if more money for these breaks became available. As of Dec. 21, there were 838 loans totaling $431 million sitting in the 7(a) loan queue, and 192 loans totaling $114 million in the 504 queue.
President Barack Obama, who urged Congress to renew the stimulus-funded breaks on SBA loans, also favors increasing the size limits on SBA loans. This, he said, would enable more businesses to expand and hire more workers as the economy recovers.
Landrieu’s committee approved legislation Dec. 17 that would increase the maximum size of 7(a) loans from $2 million to $5 million. The bill would increase the size limit on regular 504 loans, which are paired with conventional loans, from $1.5 million to $5 million. The loan limit for small manufacturers or projects that meet certain energy guidelines would increase from $4 million to $5.5 million.
This legislation also would allow businesses to refinance short-term commercial real estate into a long-term, fixed-rate 504 loan.
Kent Hoover is Washington bureau chief for American City Business Journals. He can be reached at (703) 816-0330 or khoover@bizjournals.com

Clock Ticks On Estate Tax

Financial Advisor Magazine

(Dow Jones) As Congress appears ready to let the federal estate tax lapse on January 1, a dramatic question is what a repeal will do to millions of less affluent taxpayers.
Many who now would owe neither estate nor capital gains tax on inherited assets will owe significant capital gains. And that's just one of the troubling aspects of a repeal.
There are also serious questions about how families with ailing relatives would be affected--a subject of gallows humor since a one-year repeal of the tax was first envisioned for 2010 years ago. …
Under current law, the estate tax disappears for a year in 2010 and then is reinstated in 2011…
For many advisors, the most striking aspect of a repeal is that, along with the estate tax itself, a step-up in cost basis for income tax purposes would go away. …
So, at a relative's death, "families that would not have had to pay the estate or capital gains tax now may have to pay a capital gains tax on assets that have appreciated in value during the deceased person's lifetime," said Warren Racusin, chair of the trusts and estates practice at law firm Lowenstein Sandler in Roseland, N.J.
Racusin mentioned a client whose parents gave him Microsoft Corp. stock when he was younger, purchased for relatively little, that is now worth $6 million. If the man were to die in 2009, his family would not owe capital gains tax on the appreciation. And, with good estate planning by the man and his wife, there might be no estate tax due either, because a couple can shelter up to $7 million from federal estate tax.
If the man were to die on January 1, 2010, however, his wife could owe capital gains of around $340,000 on the $6 million, figuring in a $3 million exemption for spouses, and another $1.3 million exemption for whoever inherits.
As for a retroactive tax, it would likely raise some complications if lawmakers wait too long to enact it. Relatives of some people who die in a prospective estate-tax-free period--after the end of the year but before a new tax is enacted--would surely not be pleased. Quite certainly, some would challenge the constitutionality of the tax, according to tax analysts.
Nonetheless, both the lower courts and the Supreme Court historically have defended retroactive taxes. …
Copyright (c) 2009, Dow Jones. For more information about Dow Jones' services for advisors, please click here.

Understanding the minds of retirees

A little knowledge about behavioral finance goes a long way in tough economic times

Investment News

By Michael M. Pompian May 21, 2009, 10:05 AM EST

Understanding how retiree investors are apt to behave can help advisers manage relationships during difficult market environments. …

To help advisers, I've identified four common behavioral investor types, or BITs, that reflect the patterns in which most people react to their environment.

Before we get to specific BITs, though, let's review the two types of biases that appear in all investors: cognitive and emotional.

A cognitive bias is a statistical, information-processing or memory error common to all human beings. Think of these errors as “blind spots” or distortions in the rational human mind.

Emotional biases, which are on the other end of the spectrum, are expressions — often involuntary — related to feelings, perceptions or beliefs that can exist in reality or in the imagination.

Often, because emotional biases originate from impulse or intuition rather than conscious calculations, they are difficult for an adviser to correct. Among the BITs I've identified, the least risk-tolerant are conservative investors I call passive preservers, who are mostly emotionally biased in their behavior.

There are many of these among advisers' retiree clients, so let's review their biases along the cognitive/emotional divide and consider how best to advise them.

Emotional biases:

• Loss aversion. Compared with others, conservative investors tend to feel the pain of losses more than the pleasure of gains. They often hold losing investments too long even when no prospect of a turnaround is in sight. …

• Status quo. Conservative investors often like to keep their investments … the same. They tell themselves that “things have always been this way,” and feel safe keeping things unchanged.

• Endowment. Conservative investors, especially clients who inherit wealth, tend to assign a greater value to investments that they own (such as a piece of real estate or an inherited stock position) than potential investments.

• Regret aversion. Conservative investors often avoid taking decisive actions, because they fear that in hindsight, whatever course they select will prove less than optimal. Regret aversion can cause them to be too timid in their investment choices because of losses they have suffered.

Cognitive biases:

• Anchoring. Conservative investors often are influenced by purchase points or arbitrary price levels. They tend to cling to these numbers when facing questions such as, “Should I buy or sell this investment?” Suppose that a stock is down 25% from a high it reached five months ago. A conservative client may resist selling until the price rebounds fully.

• Mental accounting. Conservative clients often treat various sums of money differently, based on where those sums are mentally categorized. They may segregate assets into safe and risky “buckets.” But if all assets are viewed as safe money, suboptimal returns usually result.

As you can see, the behavioral biases of conservative clients are largely emotional. …

…[Focus] on how investment decisions affect issues that are emotionally important, such as family, legacies and lifestyle, and try to empathize with what clients are experiencing.

When working with conservative investors, look for these biases and advise clients accordingly. Understanding your client's behavior leads to better communication and a clearer understanding of the motivations behind investment decisions — and hopefully a better client -relationship.

Michael M. Pompian, a chartered financial analyst and certified financial planner, is director of the private-wealth practice at Hammond Associates, a St. Louis-based investment -consulting firm with $50 billion under advisement.

Real estate impact to be 'massive'

InvestmentNews

By Arleen Jacobius October 5, 2008, 6:01 AM EST

The credit collapse and the ensuing de-leveraging from financial institutions are expected to have a colossal impact on the real estate investment market.

If industry executives are right, fortunes could be made, but also the number of real estate investment managers will shrink because of the lack of available capital, and portfolio returns might suffer.

"I don't think anybody has lived through what we are living through right now unless they are 100 years old. The magnitude is so massive," said Tim Ballard, chief investment officer of Buchanan Street Partners, a Newport Beach, Calif.-based real estate subsidiary of The TCW Group Inc. of Los Angeles.

"This will affect ... job growth, consumption and other things. The [savings and loan] collapse did not have nearly the same effect," he said.

Commercial real estate is in the second or third inning of a game that might go into extra innings, industry insiders said. ...

TRILLIONS IN LEVERAGE

Financial institutions nationwide might have to reduce leverage by trillions of dollars, insiders said.

According to Buchanan Street estimates, that reduction could amount to $5 trillion.

"There will be some fabulous opportunities in this," Mr. Ballard said.

"There will be folks who are forced to sell because they can't refinance," he said. "There will be more sellers than buyers, and purchase prices will decline."

But observers say that while bargains will abound, buyers shouldn't expect fire sale prices.

For one thing, managers are sitting on billions of dollars, waiting to scoop up distressed assets.

For another, under the administration's $700 billion bailout plan, the government would be paying higher-than-market prices for securities financial institutions haven't been able to unravel and sell, thus keeping their securities from hitting rock-bottom pricing. ...

MEETING OF MINDS

In the medium term, real estate professionals expect that the credit collapse will lead to a meeting of the minds between real estate buyers and sellers on price. ...

"Some real estate investors expect distressed sales to come within the next few months when short-term debt comes due and owners can't refinance and have to sell assets," said Susan M. Smith, director in the real estate advisory group of PricewaterhouseCoopers LLP of New York.

Deals will be different, though. There will be a "flight to quality," with well-located fully leased properties' fetching the best prices, Ms. Smith said.

Real estate with empty space will be tough to sell, because the banks that are still lending will lend only to the top-quality properties, she said.

Still, real estate investors won't see appreciation in their return equations, and they will have to shift their growth assumptions downward, said Sarah Snyder, vice president of Callan Associates Inc., a San Francisco-based consulting firm.

"I think you will have some good opportunities. We are starting to see some distressed debt filter back into opportunistic strategies that are more diversified," Ms. Snyder said.

"I think investors will look closer at how managers leverage and structure their debt," she said. ...

Mezzanine funds will become extremely important to lenders because they will be among the few with money. ...

"The amount of equity needed will be twofold what it was in 2006 and early 2007, impacting valuations and impacting the speed of transactions, which will be much, much slower," Mr. Ballard said. ...

VALUATION CHALLENGES

Commercial real estate across the board will face significant challenges because capital issues are creating lower valuations, Mr. Ballard said.

The number of real estate investment managers will shrink because "capital will not be available for everybody," he said.

Philip J. McAndrews, managing director and head of global real estate at TIAA-CREF of New York agrees: "As we move further into the cycle, there will be fewer players."

The field will be left to investment managers with ready cash who can move quickly and who can make returns with a minimum of debt, he said.

"You need the acumen to find the best relative value among the opportunities. A distressed transaction is not always an excellent transaction because it's under distress," Mr. McAndrews said.

Arleen Jacobius is a reporter for sister publication Pensions & Investments.

Fannie, Freddie to ease some mortgage payments

Reuters

Tue Nov 11, 2008 6:14pm EST

By Patrick Rucker

WASHINGTON (Reuters) - ...Homeowners facing foreclosure who are spending more than 38 percent of their income on mortgage payments could have monthly payments reduced by Fannie Mae and Freddie Mac in an effort to keep their homes, [James Lockhart,] the head of the Federal Housing Finance Agency said....

Soaring mortgage defaults are at the root of the global credit crisis that threatens the U.S. economy with a deep and long recession, and some economists say putting a floor under the housing market is a prerequisite to recovery. ...

Lockhart said eligible homeowners could see their mortgage rates cut, the life of their loans extended or their principal reduced in an effort to ease payments. Borrowers would need to be delinquent 90 days or more to qualify for new loan terms. ...

FDIC Chairman Sheila Bair, however, faulted the new plan for focusing so narrowly on Fannie Mae and Freddie Mac, which means it will not cover the 60 percent of seriously delinquent home loans held by Wall Street firms and other investors. ...

TRYING TO INSPIRE

Lockhart said he hopes other mortgage finance companies will adopt the new plan as an "industry standard," but mortgage investors often stand in the way of changes to failing loans.

In recent weeks, Citigroup Inc, Bank of America Corp and JPMorgan Chase & Co have all said they will ease some loan terms.

But critics say those efforts are also part of a piecemeal approach to the housing crisis that has so far failed to reverse the trend of increasing delinquencies. ...

The plan outlined on Tuesday was conceived in part by Hope Now, an industry group midwifed by U.S. Treasury Secretary Henry Paulson last year to help troubled homeowners.

Hope Now has spurred mortgage finance companies to ease terms for borrowers, but those voluntary efforts have not been enough to halt the growing pace of foreclosures. ...

MORE AID COULD COME

Bush administration officials for weeks have been trying to agree on a fresh program to aid borrowers, and Tuesday's announcement could mark the first step in a wider effort.

[FDIC Chairman Sheila Bair] has emerged as a strong proponent of more-aggressive action, but others fret too much government aid could create a perverse incentive for homeowners to game the system.

The Department of Housing and Urban Development is mulling how to expand its Hope for Homeowners program, which gave the Federal Housing Administration a $300 billion kitty to underwrite failing loans...

That program ... went into effect in October. However, it got off to a slow start and officials are eager to loosen the terms and cut some red tape to make it more appealing to mortgage companies.

Under the program in its current form, a mortgage finance company must have a home reappraised and then erase 10 percent of its value before the loan can win a government guarantee. Officials are considering lowering that required write-off, sources said.

(Reporting by Patrick Rucker; editing by Gary Crosse)

© Thomson Reuters 2008 All rights reserved

Commercial-real-estate bust is coming, report warns

But downturn will present buying opportunities over the next 18 months, industry expert says

InvestmentNews

By Janet Morrissey October 26, 2008, 6:01 AM EST

Economists and market experts say a doom-and-gloom report on commercial real estate released last week confirms the industry's worst fears about an imminent major correction.

The widely respected annual report, "Emerging Trends in Real Estate," by the Urban Land Institute of Washington and PricewaterhouseCoopers LLP of New York, predicts that in 2009, commercial real estate will suffer its worst year since the industry's crash of 1991-92, with a noticeable rebound unlikely until 2011 at the earliest. It also forecasts a decline of 15% to 20% in property values, on average, from their 2007 peaks, with even sharper declines coming in weaker markets.

Amid the gloom, however, there will be pockets of opportunity for cash-heavy investors in discounted loans, distressed debt, raw land, apartment buildings and other niches, the report said. ...

"If you look back, there were tremendous opportunities available to anyone who would take the leap and buy properties at a discount from the [government-owned] Resolution Trust Corp. — and that set the stage for strong growth among REITs," said Robert Bach, chief economist with Grubb & Ellis Co., a commercial-real-estate-services and investment company in Santa Ana, Calif.

At the time, though, there were dire predictions "that there would be no need for another square foot of commercial real estate until about 2010 or 2015," which spooked investors, Mr. Bach said. "But people who bought properties back then did very, very well."

Nevertheless, the report throws cold water on any hope for a speedy turnaround. ...

"This is going to be the worst year since the 1991-92 industry depression," Stephen Blank, senior resident fellow for real estate finance at the Urban Land Institute, said in a webcast. "We expect to see drops in value, negative returns, sharp increases in delinquencies and foreclosures — it's a bleak picture." ...

"The private commercial markets need to correct; they're lagging everything else," said Jonathan Miller, a partner in Miller Ryan LLC, a real estate marketing advisory firm in New York, and author of the ULI/PWC report. "That [correction] is going to happen over the next 12 to 18 months." ...

Of the 50 metropolitan markets tracked, the study found only two — Dallas and Houston — where prospects for investment and development in 2009 were better than in 2008, thanks to their exposure to the energy industry. ...

In general, the report urges investors to sit tight and be patient "because the markets have yet to correct as much as they're going to," Mr. Miller said.

However, the report cited investment opportunities for those with cash and low leverage, noting bottom-fishing opportunities among distressed sellers and lenders, whose highly leveraged loans are upside down. ...

On the bricks-and-mortar side, rental apartment properties should continue to show strength due to the reeling housing market. Infrastructure and transportation projects are also good bets, the report said.

Mr. Miller added that residential lots and raw land should offer good investment opportunities over the next 12 months, but investors should avoid hotel and retail properties. "It's going to be ugly in retail," he said. ...

In a recent report of its own, The Goldman Sachs Group Inc. predicted that commercial real estate values will tumble 19%, and vacancy rates will approach 1990s levels. The New York firm recommends that investors avoid REITs with high leverage, near-term refinancing risk and a reliance on development and merchant building for growth. ...

The report predicted that the debilitated housing market will bottom in 2009, but not before pricing levels tumble to 2003-04 levels. Distressed Florida condos with ocean views could offer good long-term investments when they bottom sometime in 2009, Mr. Miller said.

Fitch Ratings Ltd. in New York thinks that 75% of the housing correction is already behind us and that prices may tumble only another 10% before hitting bottom in the next few quarters.

"2009 will be downer, and 2010 may not be much better, but maybe by 2011, a slow recovery will be under way," Mr. Miller said. "It all depends on the economy — we need a jolt."

E-mail Janet Morrissey at jmorrissey@investmentnews.com.