Real Estate Investing in the Real World
Real Estate Blog
MONDAY, JULY 07, 2008

I’m not seeing a lot to like in our country’s current economic outlook.

Fannie Mae and Freddie Mac both plunged today, each tanking by around 20%. The market as a whole is hovering at around 20% below recent highs, a level that many observers use to signal official bear territory. Credit markets are in disarray, liquidity is tight, and the Federal Reserve is trying to eye inflationary pressures on one hand and stagnant growth on the other. These are scary days.

Things will turn around. Eventually. But my fear is that our economy’s recovery is contingent on a single factor: oil. And for me this isn’t a comforting thought.

Watching our current administration wrestle with energy policy is enough to make me lose my faith in government entirely. As we wade into this crisis, Washington has responded with – drumroll – more hearings and meetings. Witness a couple of recent high profile examples. Back in March the Select Committee on Energy Independence and Global Warming dragged the CEOs of the big oil companies to Washington so that they could get a proper public scolding. This was political theatrics at its worse with the committee members mugging for the cameras (and their constituencies back home) and competing to see who could poke the bad guys in the eye the hardest. No serious issues were discussed.

Not to be outdone, the Congressional Committee on Energy and Commerce (yes, an entirely separate and unrelated congressional committee) had hearings of their own last week. According to these guys the evil oil companies aren’t to blame after all – it’s the evil energy speculators who are the problem. And who is going to stick up for a bunch of hedge fund billionaires? Shut down their excessive trading, we’re told, and gas prices will come down. In no time we’ll be back to filling up our Hummers and Escalades with smiles on our faces.

Well as it turns out the later committee is the “administration friendly” effort: they’re shilling for low taxes and offshore drilling. The competing committee was established last year by Nancy Pelosi – they’re all for windfall profit taxes on the oil companies and conservation. It doesn’t appear that the committees spend too much time coordinating their efforts.

This isn’t encouraging. Snappy sound-bites on CNN don’t lead to smart policy. The proposed gas tax holiday was a quick-fix that would have done more harm than good. And drilling our offshore reserves is a medium-term proposal (at least ten years) that won’t have a measurable impact; less that 5% of global reserves are in the United States. It’s great politics to talk about “energy independence”, but for a fungible global commodity like oil this is a mirage. There’s no such thing.

But there is one factor that we can have some influence over: demand. And this has swung the wrong way over the past couple of decades. Witness our love affair with the automobile. Trains and fuel efficient cars are for Euro-geeks. As Newt Gingrich put it in a recent New York Times article “our culture favors driving long distances in powerful vehicles and the car as a social expression.”

We’re seeing the first small steps of a reversal. If you’re driving a Ford F-150 or a Lincoln Navigator you’re not going to have a smile on your face when you check out the current trade-in value. Nothing signals an evolving cultural change like the all mighty market, and the plummeting resale market for gas guzzlers is an early indication that high prices are starting to have some impact on our behavior. Are we starting to reexamine our national mantra of more-more-more?

Take a look at our collective relationship with our homes: yes the value of the average single family homes has blown up over the past couple of decades, but one fact that is often overlooked is that comparing values now with those in the seventies and eighties is really an apples-and-oranges comparison. According to census figures average size of a new single family home increased from 1,500 in 1970 to over 2,200 in 2000, while the average household size declined. It’s not just our Hummers and Escalades that we’ve super-sized.

This trend has to flatten, and this colors the way that I look at the real estate market. I don’t see the market for McMansions in the outer suburbs rebounding for a long time. Gas prices are going to stay high and this will continue to drive the reverse migration from the burbs to the urban areas. An exception, in my view, lies in areas that can reinvent themselves as city centers in their own right. An example of this is Katy Texas – a Houston suburb that is starting to attract more jobs.

So this is a scary time, overall. But as the stock market wobbles into treacherous territory real estate makes more sense than ever – assuming you’re pursuing opportunities that generate enough revenue to keep you afloat if things go south. Run the numbers, make reasonable assumptions for vacancies and repairs, then ask yourself: will I survive if this property takes a 15% hit? If so you’ve established your worst case scenario (hold tight) and you’ve done a nice job of diversifying your stock market risk while setting yourself up to profit nicely from the market’s recovery. Whenever that might happen…

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Comments(4)
posted by: Chris Smith
Comments
July 07, 2008
09:39 PM
Chris:

Your description of our government is so RIGHT ON.
The politians of BOTH parties DO NOTHING but flap their gums and fight for airtime and will not seriously address just about ANY issue because it will upset SOMEONE who gives money to their campaign. They all posture for the TV cameras. It is absurd! I guess we get the politicians we deserve because we as a NATION seem to be unable to vote for anyone who gives us the cold hard truth.
July 07, 2008
10:15 PM
Arn:: Thanks for the comment. I think the good news is that people are starting (slowly) to pay attention. Between high gas prices, the real estate slump, dropping dollar, and the stock market decline most Americans have at least one issue close to their heart. That goes double for those of us who have loved ones in uniform in harm's way over in the Middle East.

You're right. We get what we deserve. Perhaps we're starting to realize that we deserve better. We'll see...
July 08, 2008
01:28 PM
Good stuff, Chris.

Here's news to put a grin on your face: The newest poll shows The Hill has dipped further in popularity to just 9% saying they're good or excellent. Folks know what they're getting.

We're in the same position now as we were in the late 70's. There's a complete lack of leadership and vision. The first real leader who takes the bit will dominate. Unfortunately the few leaders I see either can't get elected, are still a little young, or don't want anything to do with being a politician.

My kingdom for a real leader.
July 09, 2008
10:36 AM
Jeff:: Yeah the polls tell us that we’re fed up with congress. But here’s the catch that makes the mess difficult to fix: we are dissatisfied with congress in general, but we tend to think *our* congressman is doing a great job, which is why incumbents keep their job about 90% of the time. So we’re collectively saying “throw the bums out!....but not my bum, he’s a good guy!

Presidential elections can get nasty, but they’re boxing to the Marquis of Queensberry rules compared to the biennial congressional knife fights that we stage around the country. Once the primaries are done presidential candidates have to tack towards the center, whereas voters reward our congressional candidates for being nasty and partisan.

There is a reason for this. Political districts are gerrymandered in such a way that the majority of them are safe territory for a single party. In a system like this you win elections by vilifying the other party. ”

Those of you who follow this blog know I’m working for the Obama campaign – I’ll have to write about that at some point; as soon as I find some way to tangentially tie it to real estate.
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