The Creeping Crunch When Liquidity Evaporates

Okay, so we begin a short holiday week so, most importantly, I wish you and your families a holiday filled with joy and lasting memories.

Now, what's on my mind as we close in on Thanksgiving and the end of the month?

I was thinking about how so many of those who were supposedly "in the know" claimed that the massive and historic fallout in the subprime finance market would stay contained.  Yeah, right?  You picked up on the carefully selected words of massive and historic, didn't you?  Massive, historic, and easily contained; those three just don't go together.

So, it shouldn't come as any surprise to see this headline in the Wall Street Journal Online today, "Commercial Property Now Under Pressure."

Commercial property?  What does that have to do with subprime mortgages on residential real estate?

As the passage of time unveils the truth we see that our financial worlds are incredibly interconnected.  The massive liquidity (availability of cash) throughout our financial system was a major contributor to the boom in subprime lending that led homeowner and investor alike to not acknowledge the true risk of their actions.

What is the pressure commercial property owners face?

The same thing all property owners face when values begin to decline instead of appreciate.  In a world of appreciating property values new financing is easy to find.  Flip that upside down and what was once easy becomes difficult. 

Whenever financing is secured to an asset, be it a residential or commercial property, the associated market value of the asset dictates how much, what rate, and if a deal is possible?

This is Finance 101.  Unfortunately, as the cycle of human history continues to prove, what was once basic knowlege can be easily forgotten.