...Will Real Estate Hold its value! - Posted by tony

Posted by tony on September 05, 2003 at 09:22:50:

Thanks Ray…

I appreciate all the constructive comments given. Ideas are the seeds that produce growth. That’s why its so important to have an open mind.

My comments are based on my observations. I read, I watch, I listen and I hear.

Another good book to check out is “trend tracking” by Gerald Celente. I have a cliff note version of the book. It focuses on how trends take place and how to spot them.

There’s alot of RE Investors putting their money in China, S. Amer. and most anywhere where there is stability and growth.

As far as Real estate goes in the USA, if you go with the seperation of class theroy, i say that 2nd home markets will do VERY WELL…and Low income Housing will also do VERY WELL over the next 5 yrs.

Take care…Tony

…Will Real Estate Hold its value! - Posted by tony

Posted by tony on September 02, 2003 at 22:02:54:

Demand, and Jobs, Jobs, Jobs!

That’s it. That’s my theory on why real estage goes up. The problem that we will incure (in the near future) is this: “the government has been GIVING jobs away to overseas companies for cheap labor. What happens to the labor force in this country? They must work for less…and if they make less money, guess what?.. they can only afford less house!”

WOW! uREAKA!

What a theory. Now for the kicker! The Wealthy have no problem voting for cheaper labor because they profit more. However, they failed to take into account what this does to property values. No more office demand, (because the businesses that were renting office space can’t afford to compete against $1hr labor) What happens to office-industrial-retail, real estate values if there are no tenants…THEY GO DOWN!

THERE you have it…

Simple and too the POINT.

Dam government better do something or we are all headed towards an economy with 2 classess of people. The haves and the have nots!

Re: …Will Real Estate Hold its value! - Posted by jimi

Posted by jimi on September 06, 2003 at 07:34:12:

While I agree that there are gov policies that could be vastly improved, blaming the government is a defeatist attitude. If you believe what you say. buy gold and move to Montana.

Yes, jobs are shifting from manufacturing to services that will adversely impact real estate in areas that have a high concentration of manufacturing jobs.

Previously, jobs moved from agriculture to manufacturing to the disfavor of the Ag belt.

Markets are local. If your market sucks, move. I have a friend from Redmond, Washington who rejected an offer from Microsoft to be employee #125 … he moved to NYC for some “real technology opportunity”…

Opportunity abounds, it’s up to you and me to make it so.

I disagree - Posted by ray@lcorn

Posted by ray@lcorn on September 04, 2003 at 08:52:58:

Tony,

You’re making broad assumptions from specific data. Do employment levels affect real estate? Absolutely. But does every market depend on the same types of employment? Absolutely not.

Your theory fails to account for the differences between markets. There are some markets currently devastated by the sea change underway in global production patterns and its effect on domestic employment. There are also markets experiencing great demand because emerging companies and technologies are leading the way in the transformation of production. Your theory assumes that nothing happens in reaction to the changes. Even overseas producers have to have sales, distribution and service facilities in the US. Are things changing? You bet they are. But the marketplace abhors a vacuum. Rest assured that as fast as there are losses in one sector, there will be gains in others.

If you want to watch the most immediate threat to real estate, pay attention to what is happening at FreddieMac and FannieMae. Real estate depends first and foremost on capital, both debt and equity. The potential damage that can occur in the financial markets with serious problems in either of these giant GSEs is much greater than the changes in global employment patterns.

ray

Re: …Will Real Estate Hold its value! - Posted by Chuck

Posted by Chuck on September 03, 2003 at 14:49:20:

There are hundreds of people born everyday in this country… including those who know nothing and understand nothing even as adults.

Re: …Will Real Estate Hold its value! - Posted by tony

Posted by tony on September 02, 2003 at 22:05:17:

Whoops…i mean the government is allowing corporations to use cheap labor overseas. Althought the government is contracting with source companies that farm out the labor to India and etc.

Also, the government is going to get a HUGH defeceit for this.

NO TAX BASE BABY!

How are unemployed Americans going to pay income taxes, buy goods and services, food, gas, houses, cars, boats, motorcycles, etc.?

Say hello to HIGHEST DEFICEIT in the HISTORY OF OUR COUNTRY!

We may have to consider bankruptcy!

Re: …Will Real Estate Hold its value! - Posted by tony

Posted by tony on September 06, 2003 at 19:17:24:

Jimi,

While i don’t want to live in Montana…i have bought gold stocks this year and done very well…(20% move up…thank you!)

"Yes, jobs are shifting from manufacturing to services that will adversely impact real estate in areas that have a high concentration of manufacturing jobs…“jimi”

Hello…This happened over twenty years ago dude! Get with it. Pick up your local business paper and read. Change the TV channel from “Al Bundy” to business shows and educate yourself. Technology jobs are being shipped to India! Your buddies job in NY…won’t last for more than 1 year (at the most)!

How do i know this?..I too have a friend who moved to NYC and specialized in Oracle programming (specificaly Financials). This guy has been doing this for 10 years and works for THE LARGEST FINANCIAL institution in the City. His job (along with numerous others) will disappear in by Jan 2004.

SIDEBAR: Jimi…Theres an old saying…“Don’t BS the BSer.” Get your facts straight and then present a valid argument.

ON A POSITIVE NOTE: I don’t believe this trend of exporting “tech” service jobs will last very much longer. The government is seeing the VAST errosion of their tax base as a result of this move. There is talk in Congress (at this very moment) that will inforce a job exportation tax to companies who export tech jobs. (similar to tarriffs that protect the remaining maufactoring base that remain here in the US). If they don’t do something, they will be forced to print money to keep up with the Social Services…creating Inflation which is a whole different debate.

ON ANOTHER NOTE: My Real Estate market is one of the hottest in the COUNTRY…no need for me to move. Fortunately we don’t depend on Technology…ours is weather and tourism. (s.fla)…and i do quite well.

However, i can’t (nor will i) sit here and ignor what is happening to the country. Foreclosures abound in areas where there are no more jobs. College students who have invested, scraped and clawed their way through grueling 4-5 yrs only to find their jobs are takin by $1hr labor overseas…that’s where it’s got to stop.

REMEMBER: The main post was about RE values and what drives them. Put down the beer and try to focus on the “theme of the paragraph.” The main point is “JOBS” drive values! If you add anything intelligent to add to that, (or contradict that) let us know.

FINAL NOTE: My friend, if you had ANY education concerning COMMERCIAL REAL ESTATE, you would know that one of the CHIEF components to the equation is GOVERNMENT interaction (permits, land planning, easements, etc.) That’s in ALL THE TEXT books and something you learn in Real Estate 101.

Peace…Tony (MBA, UNC 1987)

Re: I disagree - Posted by Frank Chin

Posted by Frank Chin on September 05, 2003 at 08:20:27:

Ray:

There was a discussion on the main board regarding the possibility of a RE bubble, and I commented that immigration from abroad greatly affected RE prices, especially the gateway cities.

Tony gave his views on immigrants and jobs, reposted here.

To add to what I said on the main board, data showed that immigration had propped up RE prices in NYC, and many parts of California. Data on population flows showed large emigration from NY (to FL, NC) and CA (to AZ, NV, ID) but offset by immigration from South America, Mexcico and Asia, some of which are illegal, resulting in net population increases.

Data also showed lower incomes for these groups. But what the data fails to show are immigrants doubling and tripling up, preventing rents from falling.

I mentioned in the other post that in Queens County NY where I reside, the net population increased from 1.8 million in the 1990 census to 2.2 million in the 2000 census, an increase of 400,000. Yet, with housing permits issues at a rate of 350/month, only 40,000 housing units were created in the period, housing 120,000 with the average household size of 3 in the County.

So evidence does point to doubling and tripling up. And because many of these folks are in the underground economy, offical statistics does not pick it up. Anedotal evidence point to severe undercounting in heavy immigrant area, indicating the actual population increase to be even larger.

The NY Times had an interesting article recently. Manufacturing and Financial jobs showed major declines in the NYC area. So what’s the new growth industry??

Turns out the Ethnic Food industry had been growing at a rate of 10%/year, consistenly for the last ten years.

Frank Chin

Re: I disagree - Posted by Ian_va

Posted by Ian_va on September 04, 2003 at 10:40:26:

How do you see this playing out? Will there be opportunities for value investors with money?

Re: …Will Real Estate Hold its value! - Posted by tony

Posted by tony on September 03, 2003 at 20:44:34:

Huh…?

Re: …Will Real Estate Hold its value! - Posted by Jimi

Posted by Jimi on September 08, 2003 at 06:40:34:

My point in providing the agriculture to manufacturing to Services example was to simply illustrate that the types of jobs in a dynamic economy will shift. So, it should be no suprise that a sector of the technology jobs are shifting offshore. I know that this is “so yesterday”, but do you remember the uproar when semiconductor manufacturing jobs went offshore from the U.S. to Taiwan? I think we survived that just fine … sure many manufacturing jobs were lost by individuals in the process. The most important source of wealth creation is not a repetitive job by “workers” (as per Marx), but innovations by inventors and entrepreneurs.

There is no long-term value creation in protecting the “buggy-whip industries” … and government policies that attempt to do so are futile and short-sighted.

Cheers, Jimi

Re: I disagree - Posted by tony

Posted by tony on September 06, 2003 at 19:46:03:

You have made a excellant observation. I guess in some cities, there is no limit to the amount and number of families that can share one space. NOT SO IN MY area.

They have laws here that do not permit (in many apartment complexes and condo’s) more than one family to occupy a unit.

BUT assuming this is ok with local government…what does it REALLY SAY about the economy?

It tells me a few things about non-imigrants.
1- They don’t want to pay high rents when their jobs won’t permit it.
2- Or they won’t double,triple down with other families
3- The jobs/lifestyles of the big cities have become cost prohibitive.

great point - Posted by ray@lcorn

Posted by ray@lcorn on September 05, 2003 at 09:23:32:

Frank,

That is direct evidence of the market filling the vacuum. Immigration is an overlooked influence in many markets, as your numbers from out west attest as well.

Nothing happens in isolation. Immigration patterns are a cause, and the support of the rental market the effect. The key to being ahead of the market is in understanding causes leading to predictable effects.

Everyone should take the time you have to understand their market the way you have. That’s the key to making informed decisions. Thanks for the post!

ray

Fearful forecasting - Posted by ray@lcorn

Posted by ray@lcorn on September 04, 2003 at 12:41:34:

Ian,

There are opportunities in every market. Just depends on which side of the trading you are on. The trick is to see it coming and get ahead of the crowd.

Before I make any lofty forecasts, let me remind everyone of the old adage… “economists have predicted nine of the last five recessions.”

I’m not an economist, and my crystal ball is as murky as they come. I got my ears pinned back about six weeks ago along with the rest of the world with the sudden move in long term bonds. The Wall Street Journal ran an article about the turnabout in prices, and led with the line, “Never have so many, been so wrong, about so much.” Count me among the wrong.

For the near term, meaning the next year or so, I subscribe to the “Muddle Through” theory of writer and money-manager John Maudlin. You can read his entire mid-year review and forecast on his website at http://www.2000wave.com/article.asp?id=mwo070403
It’s a long article, but it is full of insights that I have not seen pulled together into a coherent whole anywhere else.

Employment does have a direct effect on real estate values. But as a predictor, employment levels are actually a lagging indicator in a recovering economy. Companies do not start hiring until they are certain of firm footing.

Preventing that at present are two significant factors, capacity utilization and continued productivity gains. The former, capacity utilization, remains below an anemic 75%, and until that excess capacity can be put to use there is no demand to add additional capacity, hence less capital investment and lower employment levels.

The latter point of the effect of productivity gains is one that Maudlin makes so well. Productivity gains in the US continue to average 2.25% per year. The labor force grows by about 1% per year. Those two numbers add up to the growth it takes in the GDP to stop losing jobs. Therefore, until the economy builds significant steam, i.e. above 3.25% GDP growth, then we’re treading water. From the reports I monitor it seems likely that GDP growth will be between below the optimists at GAO, but above the doomsayers at the forex desks. Maybe 2%-3% for the year. If so, and long term rates stay low to protect the housing market, then we will continue to muddle through the period needed to rebalance production and demand.

But, that assumes nothing untoward happens… anyone making any prediction nowdays must add the caveat of “event shock.” That refers to the effect of another terrorist or other major event that no one can predict the outcome for.

For the real estate business, the most immediate threat comes from instability in the capital markets, hence my eye is on the turmoil surrounding Fannie and Fred. They are the twin 800lb gorillas, with over a trillion dollars in securities between them. Many think they are too big to fail. My fear is that if their elaborate, derivative-based hedging structure begins to unravel, they may be too big to save.

But even then, real estate is market driven, and specifically by local markets. There has never been a time when it is more important to understand the dynamics of the local economy around your real estate. There are some broad trends, but as with using any average, when you see the number remember that 50% of the people you know are below average.

In my area I’m seeing asking prices begin to soften a little across the board, even to NNN retail which has been the stalwart of value through the last two years. I’ve got my eye on a couple of deals, and am anticipating that the sellers market we’ve been in is about to turn. I will acquire when it is most advantageous for me to do so.

However I do not think this is a time to be highly leveraged. Greenspan said it well last week… “Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.” No one can model uncertainty.

I take that to mean I had better realize that no prediction of future results in an investment should be counted as certain based on past performance, Therefore I need to price the uncertainty into the deal… that means higher entry cap rates, higher debt coverage ratios, and the resulting lower levels of leverage.

Bottom line, its back to doing deals based on fundamentals. That means valuations based on actual operations and local market conditions, and with financing at conservative cash flow levels. You might say it is “buy based on worst-case assumptions from present operations, structure financing for the muddle through scenario, and design the exit plan for either case.” If the deal makes sense with those assumptions, then it is one worth pursuing.

ray

Re: …Will Real Estate Hold its value! - Posted by Chuck

Posted by Chuck on September 03, 2003 at 23:06:10:

Exactly.

A few other rambling thoughts … - Posted by Frank Chin

Posted by Frank Chin on September 07, 2003 at 08:54:27:

Tony:

There are some limitations on dwelling occupancy in the city but not to the extent in suburban communities, and those with HOA’s.

They started to crack down in Queens County, where I live, on illegal conversions, particularly of SFH to 2 or 3 families. There are many illegal SFH in the area used as rooming houses as well.

The problem with enforcement in the City is anonymity, and folks not knowing or caring what the neighbors are doing. Two career couples going to work, and coming home after dark have no idea how many families live next door.

Enforcement only comes when neighbors complain.

Some get caught because they do foolish things like having loud parites, parking cars in front of neighbor’s driveways. On the other hand, if they’re discrete, who would know.

As I mentioned in my other post, I leased an apartment young South Asian couple with a child, who asked for written permission to having their visiting parents stay. Nearly a year later, when he was a bit late with the rent check did I find out his parents was really living there and working at a job. His dad was injured in an on the job accident.

This episode points to the inability to keep overcrowding down, even though I made a concientious effort to do so. As to official census data, his parents are only visitors from India, and show up nowhere officially.

Some owners do not rent to South Asians because they say “you rent to 2 people, and you wind up with 20”. When the problem with my tenant arose, he mentioned that South Asians have large families and often engage in “long term visits”. Sounds like the euphemism and explanation for “you rent to 2, you wind up with 20”.

I have several observation on non immigrants.

  • They like living the suburban life style, on SFH with large lots, and need a car to get to work.

  • To have an affordable SFH, and keep the best job, some drive up to 2 hours to work. I wonder what this means to traffic and the environment.

  • Lifestyle in the city is cost prohibitive if you maintain a suburban life style in the city like owning two cars. When I returned to NYC to start REI, I bought a 3 family where I live rent free, and did not need a car. If one eliminates the rent or mortgage, plus car payments, plus car insurance, ones discretionery income increases tremendously. Property taxes are low in NYC as it has an income tax, plus manufacturing and financial businesses that paid a lot of taxes.

  • Because of peoples tendencies to buy the largest house they can afford, and prices of cars escalate, non-immigrants usually live on the edge, and must take on debts to maintain their lifestyle. A job loss usually spells disaster. In the meantime, they save little.

Now with traffic jams and road rage all the norm, baby boomers reaching retirement with no savings, it appears the “non immigrant” life style is catching up with us.

Immigrants on the other hand are culturally big savers, and do not mind “living simply” to save.

This is why they often have large cash down payments to buy homes in what we consider marginal neighborhoods, a few years after they come here. It may be marginal compared to suburban NJ, but heaven compared to the slums of Mexico.

This is one reason why “non immigrants” find it difficult to do “no money down” investing in almost all areas of Queens County, particulary 1,2 3 family homes. Why sell it creatively to someone if someone else is offering the seller 50% cash down.

Investing in Queens County, and many parts of NYC for that matter, has become very ethnic in nature, and one should be aware of it. Unfortunately, once or twice before when I made mention of some particulars on this board, my post was deleted.

That’s unfortunate, because I seen posts of people wondering why no one responded to ads, flyers, posting on bulletin boards regarding “we buy houses” ad. The answer lies in the ability of understanding the ethnic nature of Queens County, where according to census data, 48% of households does not speak English at home.

Frank Chin

Re: Fearful forecasting - Posted by Blane (MI)

Posted by Blane (MI) on September 13, 2003 at 19:59:33:

Ray,

A year or so ago when reading Fred & Fannie’s annual reports & other reporting requirements (along with numerous big banks), the derivatives thing kinda got my attention, but soon forgot about it to fry bigger fish. Can you enlighten me (us) a little about your thoughts on their derivatives and hedging? And where it might be going? Along with the 2 800 lb. gorillas are lots of 200,300,400 lb. gorillas who do the same thing. Seems like what might happen to them IMHO could happen to a lot of national or super-regional banks as well. Something about derivatives always bothered me. Thanks.

Blane

Re: Fearful forecasting - Posted by tony

Posted by tony on September 04, 2003 at 17:29:50:

Good comments and insite Ray. I’m glad you see that Real Estate Values are driven by local economics.

But, all we read and hear today is “jobs being taken overseas!” Think of the climate this creates. People become ultra conservative…and sit still. This is probably why retail is so slow. (Not to mention the cost cutting by internet retailers).

What can be done?

If you believe in lezie fare (sic), government keep out, then the corporate policies run the country. Stock sellers (corporations,in order to compete) must show strong earnings, that means cost cutting measures. Trim the fat baby!

I guess it all depends on your perspective. If you are a class smoe (the proletariate), you tend to look at things from that level. If you are a upper class (the bouguesis, sic) then you have a different perspective.

Re: …Will Real Estate Hold its value! - Posted by tony

Posted by tony on September 04, 2003 at 17:33:01:

Chuck,

We welcome any constructive thoughts or criticism. (anxiously waiting for your reply).

Re: A few other rambling thoughts … - Posted by tony

Posted by tony on September 07, 2003 at 22:34:59:

That’s an incredible story Frank…Thank you for sharing. I enjoy your incite and straight ahead logic.

I guess Queens has really changed. I remember when queens was heavily populated by Italians, and Italian Jews (twenty years ago). You just said a mouthful!