56 Month's Supply of Town Homes

Middle Age Man was a SNL skit, but I think today it should be reinvented to include a middle aged man who is a banker and the skit or punchline would be he comes in with crazy ideas about real estate projects that stand as much chance as I do with Selma Hayek.

So let me give you a little inside information about the banking world.

Bankers are paid on commission. So if you come in and say, "hey, I have an idea to make little truffles or trinkets and need $40,000 for a trinket machine" it will take about 30 days for them to pull their asses off the golf course get around to looking at your proposal and then another 30 days to shoot it down. And it doesn't matter if it's a great idea, the problem is the amount of money you're asking for is not high enough.

Now, if you're some bloated, embezzling real estate developer that never really makes money, just keeps rolling over debts and hoping asset values go up faster than your debt load, bankers like you because you're probably going to ask for more than $40,000 and therefore they'll get higher commissions.

This results in a perverted incentive to approve larger loans since the commission would be larger, regardless of the likelihood of repayment.

So you could imagine the excitement when a real estate developer would have a proposal not just to build town homes, but LUXURY town homes that would be priced in excess of $1 million. Bankers would fall over each other to approve such a loan.

There's just a couple problems though with these luxury town homes.

First off, if I'm spending a million dollars or more on a house, it isn't going to be a town home that I have to share with other people. If I'm forking over a million dollars, I want my yard so big that I don't see houses within a 20 miles radius of my house. So when I'd see these proposals I would always scratch my head when asking "who exactly comprises the market for this?"

Secondly, I remember doing my research at the time and seeing that in one year more "luxury" town homes were under construction than had been constructed in the past 3 years in the metro area. I remember presenting my findings to the then corporate mucky mucks who pooh-poohed it away.

So during my monthly perusal of the Minneapolis Area Association of Realtor's research page I was laughing my ass off when I saw this;



56 month's supply of new town homes are on the market in the $1 million + range AND THAT"S JUST THE NEW CONSTRUCTION!

So those banks get to keep lending money to these real estate developers for the next 5 years until those properties sell. Sadly enough interest will accrue to the point the amount these developers owe the banks will exceed what the town homes will sell for, but that doesn't matter because as long as the banker got his commission then everything's alright.

Regardless, there's a lesson here all junior, aspiring and deputy economists. And that is you may not be popular, you may temporarily slow down your career, and you may have middle aged men angry with you because you're not playing ball and making it so they can afford a new Lexus, but it's all worth it in the end when you get to tell them;

"I told you so."

So to all those bankers who ignored basic economics and market research, to all those bankers who made loans to their friends because "they're good guys," and to all those bankers who are now unemployed or working as a car salesman, me, my colleagues and a bevy of other economists, analysts and researchers who were sounding the bells quite some time ago, just have one thing to say;

"I told you so."