April 18th, 2012
I just recently wrote in this space about the housing market’s affect on our broader economy. It appears as if real estate is the Pareto principle at work. Five states (Arizona, California, Florida, Michigan and Nevada) have generated a shocking 46% of the nation’s foreclosures[i].
While there are a number of forces as work, there is one explicit predictor of foreclosure activity. States where judges must approve foreclosures in writing have 260% more activity than in other states. As homeowners and banks wait for the government to take action, markets spiral downward, only diminishing the value of properties that have positive equity.
In the states where foreclosures are dealt with quickly, the market has already begun to turn. Each of us can reach our own conclusions about the role of government (this is not the appropriate venue for such a debate).
The broader point is that the U.S. real estate market, like many other markets has vast regional differences and elements within it moving in different directions. The concept of the “business cycle” is a bit of a misnomer. Traditional cycles have been disrupted and replaced with a series of variables that drive markets very quickly, sometimes without pretense or warning.
The events that created the recent housing bubble created the perfect storm. The recovery will be another type of storm, with regions and even areas within regions recovering more quickly than others. We see similar phenomena in employment and growth in various industries.
It used to be that selecting the right industry was enough to ensure some level or prosperity. Today, entrepreneurs and investors need to find very specific opportunities and niches where growth and profit are plausible.
Like everything else, choose your real estate carefully.
[i] The Kiplinger Letter March 16th, 2002
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Posted by Marc Emmer - President - Optimize Inc.
June 24th, 2011
Here we go again. A wave of uneven economic new items about housing, employment and equities have made some entrepreneurs queasy. Should companies shift their forecasts based on the latest economic headlines?
To get caught up in the conventional wisdom and buzz offered by analysts and the news media can be a trap. Emotions govern our thinking on many levels. The electronic age has brought new volatility to markets, and has created a fertile environment for both arbitrage by institutional types, and droves of individual investors moving in unison to support some conventional wisdom about energy prices, gold, or the stock price of Intel or Apple.
It is as if our economy is a large rubber band susceptible to large swings based in part on the national mood. Our current reality is that if the economy is growing at a 4% clip it is perceived to be expanding, but at 2% we feel as though it is sluggish.
Our thinking often crystallizes around “the economic cycle” which cannot be evaluated independently. The economy is merely a component of a spider web of stressors that can be deeply affected by social, economic, cultural, political and military events.
U.S. history is riddled with periods of growth and decline steered by such mood swings. After the panic and fear of the Great Depression, and World War II, the United States settled into a period of profound optimism and growth. They were happy days in America, as the Wonder Bread/Leave it to Beaver era reigned in conformity and stability.
With scant warning, the JFK assassination inflicted a deep wound, a precursor to two decades of volatility and violence, as our nation slid into a deep funk. It took twenty years for the pendulum to swing back again. On the heels of the U.S. hockey team’s Gold Medal in the 1980 Olympics, Ronald Reagan proclaimed “it was morning in America” during his State of the Union in 1984 alluding to the nation’s restored optimism.1
The Dow Jones Industrial Average shot up by a factor of eight times from 1982 to 2000 only to lose half its value between 2000 and 2008 as the market crashed again.2 A similar bubble occurred in oil futures, with oil reaching $145 per barrel in July in 2008, only to fall within a year to trade in the $50 range. Clearly, bubbles represent investors overreacting to markets and accepting a new perception of normalcy and a different tolerance for risk. The entrepreneur must be conscious of this tendency, and make measured decisions based on facts.
While I am not one to offer economic forecasts or investment advice, I believe overreacting to current news items could be limiting. While many sectors of the economy are indeed sluggish, others have great upside and are worthy of investment.
[1] The Fourth Turning by William Stauss and Neil Howe - Broadway Books
[2] Animal Spirits by George Akerlof and Robert Shiller- Princeton University Press 2009
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Posted by Marc Emmer - President - Optimize Inc.
