An Insider’s View of the Real Estate Train Wreck


The first time I spoke with real estate entrepreneur Andy Miller was in late 2007, when I asked him to serve on the faculty of a Casey Research Summit. And there was no one in the nation I wanted more than Andy to address the critical topic of real estate.

My interest in Andy was due to the fact that he has been singularly successful in pretty much all aspects of the real estate market, including financing and developing large projects – such as shopping centers, apartment communities, office buildings, and warehouses – from one end of the country to the other. His expertise has also allowed him to build an impressive business providing assistance to large financial institutions that need help in dealing with problem commercial real estate loans. As you might suspect, business is booming.

Back in 2007, however, what most intrigued me about Andy was that he had been almost alone among his peer group in foreseeing the coming end of the real estate bubble, and in liquidating essentially all of his considerable portfolio of projects near the top. There are people who think they know what’s going on, and those who actually know – Andy very much belongs in the latter category.

In fact, he initially refused to speak at our event, only agreeing very reluctantly after I had hounded him for several months. The reason for his refusal, I later found out, was that he had spoken at several industry events before the real estate collapse and had been all but booed off the stage for his dire outlook.

So far, Andy’s real estate forecasts continue to come true. As you’ll read in the following excerpt from my latest interview with Andy, who now spends considerable time each day helping the nation’s biggest banks cope with growing stacks of problem loans, he remains deeply concerned about the outlook for real estate.

GALLAND: No one has been more right on the housing market in recent years. So, what’s coming next? Some of the housing numbers in the last few months look a little less ugly. Could housing be getting ready to get well?

MILLER: I don’t think so.

For all intents and purposes, the United States home mortgage market has been nationalized without anybody noticing. Last September, reportedly over 95% of all new loans for single-family homes in the US were made with federal assistance, either through Fannie Mae and the implied guarantee, or Freddie Mac, or through the FHA.

If it’s true that most of the financing in the single-family home market is being facilitated by government guarantees, that should make everybody very, very concerned. If government support goes away, and it will go away, where will that leave the home market? It leaves you with a catastrophe, because private lenders for single-family homes are nervous. Lenders that are still lending are reverting to 75% to 80% loan to value. But that doesn’t help a homeowner whose property is worth less than the mortgage. So when the supply of government- facilitated loans dries up, it’s going to put the home market in a very, very bad place.

Why am I so certain that the federal government will have to cut back on its lending? Because most of the financing is done via the bond market, through Ginnie Mae or other government agencies. And the numbers are so big that eventually the bond market is going to gag on the government-sponsored paper.

The public doesn’t have any idea of the scale of the guarantees the government is taking on through Fannie, Freddie, and FHA. It’s huge. If people understood what the federal government has done and subjected the taxpayers to, there would be a public outrage. But you can’t get people to focus on it, and it’s very esoteric, it’s very hard to understand. But it’s not something the bond market won’t notice. The government can’t keep doing what it has been doing to support mortgage lending without pushing interest rates way up.

Refinancings of single-family homes are very interest-rate sensitive. Consumers have their backs against the wall. They have too much debt. Refinancing their maturing mortgages or their adjustable-rate mortgages is very problematic if rates go up, but that’s exactly where they’re headed. So anyone who’s comforted by current statistics on single- family homes should look beyond the data and into the dynamics of the market. What they’ll find is very alarming.

GALLAND: On that topic, recent data I saw was that something like 24% of the loans FHA backed in 2007 are now in default, and for those generated in 2008, 20% are in default, and the FHA is out of money.

MILLER: Fannie Mae had a $19 billion loss for the third quarter of 2009, and they are now drawing on their facility with the US Treasury. We have all forgotten that Fannie and Freddie are still being operated under a federal conservatorship. On Christmas Eve, the agency announced that it was going to remove all the caps on the agencies.

GALLAND: So what about commercial real estate?

MILLER: When I saw what was happening in the housing market, I liquidated all my multi-family apartments, shopping centers, and office buildings. I liquidated all my loan portfolios, and I’m happy I did.

It occurred to me in 2005 and 2006 that the commercial world had to follow suit. Why? Because it’s a normal progression. Obviously, when single-family homes decline in value, multi-family apartments decline in value. And when consumers hit the wall with spending and debt, that’s going to have an impact on retailers that pay for commercial space.

Furthermore, the financing for retail properties had gotten ludicrous. The conduits were making loans that they advertised as 80% of property value when they originated them, but in reality the loan-to-value ratios were well over 100%. And I say that to you with absolute, categorical certainty, because I was a seller and nobody knew the value of the properties that I was selling better than I did. I had operated some of them for 20 years, so I knew exactly what they were bringing in. I knew what the operating expenses were, and I knew what the cap rates were. And, you know, the underwriting on the loan side and the purchasing side of these assets was completely insane. It was ludicrous. It did not reflect at all what the conduits thought they were doing. They were valuing the properties way too aggressively.
I became very bearish about the commercial business starting in late ’05.

GALLAND: Beyond the obvious, that the real estate market has taken pretty significant hits and some banks have been dragged under by their bad loans, what has really changed in real estate since the crash?

MILLER: I think the first thing that changed was that people learned that prices don’t go up forever. Lenders also saw that underwriting guidelines for commercial real estate loans, especially in the securitization markets, were erroneous. They realized that some of their properties had been financed too aggressively, but still, I don’t think even at the fall of Lehman, anybody was predicting a wholesale collapse in commercial real estate.

But they did see they should be more circumspect with loan underwritings. In fact, after the fall of Lehman, they completely stopped lending. I think they realized we had been living in Fantasyland for 10 years. And that was the first change – a mental adjustment from Alice in Wonderland to reality.

Today it’s clear that commercial properties are not performing and that values have gone down, although I’ve got to tell you, the denial is still widespread, particularly in the United States and on the part of lenders sitting on and servicing all these real estate portfolios. People still do not understand how grave this is.

To be continued…

David Galland
for The Daily Reckoning Australia

David Galland
David Galland is the Chairman of Casey Research, publishers of BIG GOLD, an inexpensive monthly advisory dedicated to providing unbiased and actionable research on simple, effective and cautious ways to participate in rising gold markets.


  1. When the Chinese property Bubble Bursts presumably the Aussie property Bubble will burst also.
    You can’t have one without the other. If Australia owes it’s current financial status to the Chinese Boom then it must accept the inevitable downside when the Bust takes place shortly.

  2. I trust that part two will tell us where he’s putting all his money now it’s out of real estate :)

    Cameron Clawhammer
    February 14, 2010
  3. “When the Chinese property Bubble Bursts presumably the Aussie property Bubble will burst also. You can’t have one without the other. If Australia owes it’s current financial status to the Chinese Boom then it must accept the inevitable downside when the Bust takes place shortly.”

    Oh, “You can’t have one without the other”? Precisely the kind of thinking which got Keen into trouble… it MUST happen here… . Shortly? ‘Presumably’ you’re with the 5 – 6 month push, Bargearse…

  4. “Precisely the kind of thinking which got Keen into trouble”

    Just because it has not happened yet does not mean it is not going too…

    “Shortly? ‘Presumably’ you’re with the 5 – 6 month push”

    More likely 12 to 18 months than 5 or 6..

    Supply and demand will change with tighter credit and higher rates..
    As people find it harder to service the mortgages on their houses more will come on the market.. tighter credit conditions will limit borrowers.

    Interest rates going up is a good thing, reinforces our economy is strong.. not such a good thing for those that are over commited or have no history of savings, be more concerned if interest rates start coming back down.

    Watch the real estate market for increasing numbers of houses coming on market as rates get higher and higher.. especially auction listings and then watch clearance rates reduce…

    February 15, 2010
  5. im trying to work out whether to list my investment property remaining (one is going through now) so i do have cash on the line in this.

    oh yeah im in the 1 -2 month push myself. the false economy in the US will show itself sooner than we think and the chinese wont be able to bluff over the drop in trade quite so strong this time. US bond prices will drop, yields will go up and the cost of finance for australia will be up up up…

    either that or the funny money will hit the streets on mass and i’l have been completely wrong.

  6. OK… just laying it all out so we have the picture. F Phil says 5 – 6 months for the great property crash (40%); Shoe Son says 12 – 18 months. Nice to have some specifics.

    Interesting to see how the Barefoot Investor has turned 360 on all this, BTW. From a position of “stupid FHBs”, his most recent take is “We should all have bought!” (The Sunday Times, 14/02/2010)

    Shoe Son, you’ve contributed nothing new here at all, other than flip Keen’s prediction of zero interest rates in Australia to the opposite situation, correctly predicting rising interest rates. If the over-committed sell, rather than renting out homes that have met the six-month criterion, they’re probably not smart enough to be home-owners… ! :)

  7. Oops… jumped the gun. Matto says 1 – 2 months; F Phil says 5 – 6 months; Shoe Son says 12 – 18 months. Nice to have such a range of predictions… all under the two-year period Keen blew, too. Losing confidence, Matto? Sell.
    If prices rise, as they did after Keen sold, you’ll have learned a valuable lesson about Australian realty… . Although, come to think about it, seems Keen hasn’t really learned that much; although his contributions to homelessness, on two different levels, will be welcome in April… .

  8. they may not have the cashflow to rent out their houses after 6 months… being over commited to debt would have that effect…

    Cherry picking a sentence from Barefoot Investors article does not mean he has gon 360.. You will find he is still concerned greatly on a housing market collapsing…

    February 15, 2010
  9. yeah losing confidence but i think the kicker is other personal reasons too. who knows? not me, but im a bit cautious at the moment and can back that up in my mind with other personal incentives.

    whether it does happen or not, i think its wrong to think it cant. i dont think it’ll be a 40% fall though, maybe a 20% correction on the outside.. all comes down to the worlds continued finance of our debts. so far so good though i must admit.

  10. “You will find he is still concerned greatly on a housing market collapsing… ”

    Probably wise to have two bob each way if you’re spruiking crash to the Australian public, I guess. Scott’s bet is not as well known as Steve’s, so it will be fun to remind him of his wager… .

    “…they may not have the cashflow to rent out their houses after 6 months…” Cashflow? Don’t follow your drift, here. (Are you sure you still have shoes?!~ ;) )

  11. If property crashed 40%, it will probably go back to the level it was at when Steve Keen said it would crash 40%.
    Seriously, all you can really do is look at your individual circumstances, and if you feel uneasy with your current property holdings, sell them. If the world was to “again fall off the cliff”, wouldn’t the RBA again reduce interest rates to emergency levels?
    Wouldn’t this also mean those who keep their jobs in the future meltdown would be financially better off, because of lower interest payments, reducing the number of stressed borrowers, and so reducing the number of forced sales of houses, and thereby protecting the market.
    In 2008, didn’t the Government “request” banks to give people a 12 month moratorium on payments – why wouldn’t this happen again?
    All levels of governments have their noses in the real estate trough, and will do things to keep it propped up, including some things nobody has thought of yet.

  12. “Don’t follow your drift”

    Well mortgages are not alot of recent home buyers problems… they gave also bought cars and household goods funded with easy credit.. Alot of Australians are too far indebted with consumer credit on top of their mortgage… this is the problem

    February 15, 2010
  13. “…they may not have the cashflow to rent out their houses after 6 months… Cashflow? Don’t follow your drift, here.”

    Explain the ‘cashflow’ needed to rent one’s house, Shoe-son.

    We agree that new cars are ‘bad debt’. As the owners of a _few_ houses, we do not understand this ‘cashflow’ you insist is required to rent a house to someone else… . _This_ is the problem…

  14. most will have to pay more in loan payments than they will recieve in rent.. negative gear a property you have to make up the short fall on the monthly payments to claim back on taxes..

    So they need to support themselves, pay the shortfall of the negative geared property and service the consumer credit, cars, harvey norman interest free purchases for the furniture and big screen tv that they just had to have as well, credit cards and that trip to Bali… that is the cash flow problem.. even more pronounced if it is 18 months down the track Mary and John working becomes just John working because Mary is having a baby…
    In short they will have cashflow problems…

    February 15, 2010
  15. “MILLER: I think the first thing that changed was that people learned that prices don’t go up forever.”

    It’s weird, but I still hear this old chestnut around the traps here. Not nearly as often as a couple of years ago, though.

  16. Last chance: Explain the ‘cashflow’ needed to rent one’s house, Shoe-son.

    So far, all you’ve done is explain why an _extremely foolish_ couple might find themselves in mortgage stress, son: new car, credit cards, big TV, trip to Bali, new furniture, the new baby, the whole property-bear-perfect-storm… ;)

    In your scenario, they’re _losing_ the house. Now, they get to _keep_ it, with _income_ from it. Like most bears, you fail to appreciate that rent usually covers interest. You get tax claims later… you know, that negative gearing of which you bleat… . Anyone who sells in the scenario you present actually deserves to lose their home. They didn’t do any homework. And I suspect that’s your problem… .

  17. Investing in real estate is not for everyone and like anything there are lemons and fraudsters and whatever else so buyer beware etc. But I think it’s easy to become overly simplistic and knock the idea of investing in real estate (housing in particular). For example:

    People who take out a loan to buy a house to rent it out (and thereby negatively gear it) would be brave to take out a loan over 80% of the purchase price, as would be the financial institution. Taking this into account, the interest repayments will usually be less than the collected rent at the outset, or at least easily covered by the individual’s spare income. People usually factor in a period of having no tenant, just in case.

    When a house appreciates in price (as distinct from value) this decreases the proportion of the loan on the probable market sale value. Rents rise however and in a few years the interest repayments count for less and less, the loan is repaid, and the investment begins to mature.

    The big unknown is how much must be spent on maintenance and repairs. A well chosen house (and even more so the tenants) minimizes this and allows the situation to be at least a bit profitable. Other factors like (for the big time investors) eliminating real estate agents in some way can increase the return further.

    On the whole, though, this kind of scenario is pretty low risk – as long as the owner is able to some how earn some cash to pay the bank when the house is empty and the bills keep coming in. Painful, but most of the time this doesn’t happen – but when it does, and then the individual is pushed to sell, it can be an ugly situation because chances are it’s happening to a lot of other people at the same time. I’ve met many people who got burnt in the rentals game because they DID come into cash flow problems, but almost always it was due to poor planning – failure to understand risk, and usually an excessive optimism.

    On the other hand, there are those who buy and sell houses for speculative gain without a plan for renting out – the risk is higher because real estate is heavy to buy and sell. It’s doable, but it’s like watching hippopotamuses gambling in a mud bath – so personally I don’t go for it (and I’m glad not to be in the least bit tempted to try).

  18. Always found that ‘gambolling’ is much more fun than ‘gambling’, Dan. :)

  19. Some moves in QLD to tackle affordability issues last week – They are making it easier to build duplexes – Not everyone’s happy of course.

  20. “By removing the full council assessment, which can cost up to $6500 in fees”

    Always wondered why you were complaining about council fees, Ned. Now I understand. That’s bloody outrageous! :(

  21. They’ve got lots of ways of getting blood out of stones in the deep north Biker – I heard yesterday that FHBs can still get dirt for $100k in the Melbourne boondocks. Just looked through North Brisbane boondocks stuff and apart from a 405 m2 block with no services “yet” for $100k, the next cheapest was $165k, then they were straight into the $170ks.

    Not that any of it is really “Brisbane” of course. But then the $100k “Melbourne” stuff mightn’t really be Melbourne either for all I know.

  22. Rent doesn’t cover the interest on a lot of homes recently purchased.. especially in Melbourne and Sydney over in WA were you are things may be different.

    Rental yeilds are 4% or less typically..
    A lot are over committed so the astute property investor you may be, most are not…

    Cashflow is a serious problem, if you can not understand that then your on a another planet. 50% of first home buyers are alreeady in financial stress…

    February 16, 2010
  23. $400000 House 18 months ago
    $360000 Mortgage

    Mortgage rates hit 10% (as they will and may be even higher)
    $35000 to $36000 a year in interest alone…

    Rent would be about $24000 a year.. Shortfall is $1000 a month.

    With having to live somewhere while the rent, pay the shortfall on the housing loan and meet their other commitments they will find themselves with a cash shortfall.. thier are too many buyers in this situation, especially in Melbourne and Sydney that house prices will be effected WHEN not IF they are forced to sell…

    Buyers that spent even more than that on a house say $700000 with 10% deposit are going to be even worse off…

    February 16, 2010
  24. Ned S

    $110000 will get you a 400m block in Melton.. about 45k’s out of Melbourne.

    February 16, 2010
  25. Shoe – quite right you are that the interest bill is high now given current property prices. Price/earnings is not ideal in many places – but that’s just the thing, if you do the maths you’ll walk away from the idea.

    But most FHOG recipients are not “investors”, and I’d be guessing that most others with debt stress aren’t either. When buying a ‘first home’ people ought to look at it as a rent-replacement, and if the weekly cost of ownership is astronomical, then forget it. If there’s nothing available to make a good business case, then frankly it’s fair to wait for a correction (either in rental prices, house prices, or wages) because those kinds of prices are by definition ridiculous.

  26. Mortgage stress is an interesting term. One that can be used somewhat loosely I suspect. A mob that gets quoted by the press in relation to it sometimes (Fujitsu Consulting) apparently:

    “Instead of defining mortgage stress as borrowers spending 30 per cent of their after-tax monthly household income on repayments, Fujitsu Consulting asked respondents to fill out a 13-part questionnaire.

    It asked consumers if they could meet loan repayments and if they had to sell their property.”

    “Severe mortgage stress was when borrowers were falling behind in repayments, thinking of selling up or facing default proceedings against them.”

    Hardly quantitative, but there we have it anyway! :)

    And Yes, I fully suspect the report I heard about Melbourne and $100k blocks of dirt may have mentioned a place called Melton.

  27. Keen is also quoting from Fujitsu Consulting I see:–warning-on-crazy-house-prices-20100216-o4h5.html

    A very sad little media tartlet display I must say.

    Maybe he’s tired of being an academic and fancies a future as a pollie?

  28. Keen’s becoming a bloody embarrassment – Gaw’d, how I wish I could become an Oz uber property bull so no-one would ever think I am or was anything at all like him! :)

    So what’s ya fix Steve – Pull the rug on all the debt and destroy the economy? Hey I’m stupid, but even I know you don’t get into politics saying that mate.

    As much as I loathe Anna Bligh’s mob, at least they’ve made a move in the right direction recently. Towards supporting “affordability”. “Suitability” under the circumstances even??? – Although Lordy help anyone in this country who presumes to suggest what might be “suitable” – It smacks just WAY TOO MUCH of seeing some value in living within our means. Rather than reckoning that someone should do something/something should happen to change one’s means so that we can afford to live within them. :)


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