looking back / looking forward - Posted by Mike

Posted by Killer Joe on May 07, 2006 at 15:36:55:


One way to look at this is ‘where is the available cash going to flow?’ Since a barrel of oil also yields such things as our plastic, pharmasutical, and fertalizer stocks, as well as a host of other daily neccessities, the cash will have to flow there first. This could very well affect the amounts leftover for the financial institutions specializing in RE loans to monopolize. The current run-up of RE values is a direct reflection of abundant capital available to finance RE. As consumers are forced to redirect their available funds into ever increasing costs associated with our modern way of living, their ability to put larger and larger allotments of funds into housing seems in jeapordy, imho.

The true cost of building new construction as well as refurbishing existing structures will play a large part in how this all unfolds. The ‘leftover’ profits available to investors today may well be swallowed up by the costs of the infrastucture @ $120.00 a barrel. That is unless you believe the pie will get a whole lot bigger, but that infers a level of inflation that Uncle Sam is trying hard to not allow.

Since history has shown that everytime the rules are changed the players find some new ground to persue, or other ways around the obstacles, there can be no definite ‘cause and effect’ truisms that could be counted on to help determine a clear path with minimum risks and maximum gains. But this has always been the case, and as it is also the case that all markets seek equalibrium over and above a permanent pendulum swing in any direction, only time will tell. So the question is ‘how volatile will the situation become?’

It is not far fetched to foresee that a portion of that volativity will play out in shortages for goods and services as the scramble is on to adjust for rising oil prices and depleting reserves. One of the larger factors involved this time around that defines this peroid as opposed to the oil crisis of the '70s and '80s will prove to be our transfer of the Western lifestyle to those fine folks in China. They will at some piont have a larger say in the global markets, especially energy resourses, than we will here in the States. We will not have the power to enforce our will over theirs, only the leverage to influence, and that could be an ever diminishing resource as well.

I only mention that because as we all know RE markets are local markets, but never in our history have we let forces halfway around the world determine what the cost of our housing will be, at least from the infrastructure side. It was fun when we allowed W-M and HD to go offshore in search of lower prices, and make parts of our infrastucture cheaper in the short term, but those days are over, and the waiter is on his way to our table with the check. Just as an example, watch what is going on with plumbing fixtures coming from China in the next year.

Getting back to your understanding of what $120.00 pb will do to the airline industry, I think you can apply a great deal of that understanding across the board. Just as my cost of flying from LA to DC and back (26 flights in the last 12 months) has gone from $216.00 RT to over $400.00 for the same seats, so has my cost of running my cars and trucks, heating and cooling my homes, and almost everything else I do. Where do you think this puts me in regard to affording more money to drive RE prices higher? Sidelined for now to say the least. As a wholesale buyer who only looks at apprieciation as icing I will still do alright, but those folks who need apprieciation to come out ahead won’t be around very much longer. That of course will drive down demand, and inturn prices, until we reach a new equalibrium. I’m looking forward to that.

As a parting thought, I am seeing a flight from the DC area out into the countryside where land is still affordable. The cost of the infrastructures is rising in all markets, but the underlying cost of the land is strictly driven by supply and demand. As our population increases we can only build out or up. My guess is we’ll see both at an accelerated rate. The trade off in building up is less commuting, and the trade off in building out is cheaper land. Both segments have long term growth potential as well as advocates of the different lifestyles. It is ironic that whatever is thrown at us sooner or later we get used to it and it becomes the norm. I don’t think that will ever change.

Here’s to the future,


looking back / looking forward - Posted by Mike

Posted by Mike on May 07, 2006 at 13:23:27:

I’ve been told my building ( mostly local buisnesses with one national francise )which sits in a good area with lots of growth potential could sell at a 8 cap. I understand a similar area full of national tenants could sell for a 6 cap. So using cap rate only, (and I know there’s other ways of valueing properties) does anyone one know historical cap rates? What would similar properties have sold for say 10 or 20 years ago.

Now looking forward…

How will $120.00 per barrel oil prices, another terror attack, bird flu pandemic, affect us. I could see one of these 3 happining in the next 5 years ( I wont mention goverment overspending since thats already happening )Any crystal balls out there willing to guess the health of our industry down the road. I’m clear what $120.oo Oil will do to the airline buisness since I’m in it, however it doesn’t seem as clear with regards to properties. I don’t mean to sound paranoid, just pondering different options.