I am afraid you are going to be hearing the term “Cramdown” a lot in the near future.  It is one of the tools available to help ease the foreclosure free fall that is occurring in the real estate world.

Cramdowns can have some positive impacts on the market, but there is also some negatives as well.  I will elaborate but first watch this great video explaining what a cramdown is.

This video below is done by Marketplace.org Whiteboard Series.  I highly recommend it.


Cramdowns from Marketplace on Vimeo.

Now as the video explains there is some good and bad that comes out of a cramdown. Primarily good for the homeowner, and good and bad for the lender.

What is left out of this video is what happens to the $250,000 the was removed from Fred’s primary mortgage. Does the bank just eat it? Will they be reimbursed for this loss from the Federal Government? If the house is eventually sold for more than $750,000 who gets the extra income?

To be honest, I don’t know the answer, but it is important because it will determine whether this cramdowns actually have an impact on the foreclosure market or not.

More to come….

Obama has pushed his “stimulus bill” through and it looks like he will sign it into action in a few days time.

But what is really in it and how is it going to impact real estate developers?

Well, there are many lists of what is actually in the package and all seem to have “overlap” that creates confusion.  For example, most lists shows about $40 billion slated for infrastructure improvements (primarily roads) but there is also listed $10 billion for improving a handfull of government buildings.   It is unclear, if that $10 billion is part of the $40 billion or in addition to it.  Examples of this are everywhere so it is unclear how much really is slated for development.

(By the way, if you want to see how the goverment can spend $10 billion dollars on a handful of buildings, go here, “800 Billion Reasons to Worry“.)

Whatever the final number is, most developers I talk with are asking how fast is it going to happen.

But maybe that isn’t the right question.

The question I am asking is “What impact is this going to have on the cost of construction?”

You see, I am working with several developers who would love to pull the trigger on projects but the financials just don’t work - primarily because construction costs are still high.  (Yes, construction costs have come down some – but not nearly at pace with the other variables involved.)

So these developers are content to sit and wait until costs catch up with everything else, supply and demand come back into balance, and these projects become financially feasible.

That is going to take much longer because of the stimulus package.  The stimulus package that Obama is about to sign will create billions of dollars worth of demand for construction materials and the effects of that demand will impact material prices all across the country.

The stimulas package will keep material costs from coming down and keep many real estate development projects from actually happening.

Sure, the localized areas where the goverment construction actually occurs might see a bump in there local economies – but that is going to be extremely local.  Meanwhile the rest of the country where these government funded project are not located will be far worse off.

Laws of demand and supply will continue to remain out of balance, keeping growth from happening for a much longer period of time.

I hope I am wrong on this one.  But I haven’t seen or read anything to prove to me I am not.