Saturday, January 30, 2010

Shall we speculate?

Reading American History in junior high school, there were all these paragraphs about Panics and Depressions. More often than not the words "real estate speculation” appeared in those paragraphs. Images of dastardly speculators with handle bar mustaches came to mind although truthfully I did not know at the time what speculation meant. I’m pretty sure I know now.


While real estate is often classed as an investment, in and of itself, it has no intrinsic value. Gold and diamond, on the other hand, by their beauty, rarity, and acceptance as a medium of exchange have intrinsic value. Real estate’s value is derived by its use (and because of our system and tradition of private property and contract law, but that is a story for another day).


There many ways to use real estate to create value. Farmland has value based on its fertility and ability to grow corn, soy beans, etc. Timberland has value based on the species, quality and age of the trees grown on it. An apartment building has value based on the net income it will generate to the owner. A single family house has value because it can both provide shelter and create a sense of place for a family. A retail store has value not only because it provides a merchant a place to do business from but also because it provides its owner, often the same person, a stream of net income. The list goes on and on, but hopefully you get the picture. These types of value creations tend to be stable and predictable, characteristics that generally bode well for a business, a community, and the economy.



Webster defines speculating, among other ways, as “to take part in any risky venture on the chance of making huge profits”. I think Webster should add the word “quickly” after the word “profits”. History will show that one definition of “risky venture” is the acquisition or development of real estate without having a specific end use, or user, involved in the acquisition or development, and further, when the acquirer or developer does not have the financial wherewithal to hold the property vacant for an indefinite number of years.



In 2004 I had a conversation with an old friend from Cincinnati who is in the food supply business. At the time, he and his wife owned the rights to, and obligations for, four condominiums in Florida. If I remember the story correctly, they were planning on living in, or using themselves, none of these units. Also, none of the units were finished construction. Several years earlier they had bought a condo unit under construction with the intent of keeping it, only to be offered such a substantial profit that they sold it. It worked so well the first time, why not try it again, and again? I understand the demographic picture that can be painted with the tidal wave of baby boomers retiring to Florida, but when a food salesman from Cincinnati owns four unfinished living units there for the sole purpose of flipping them for a much higher price to a new buyer as they near completion, a reasonable person might call that either speculation or the “greater fool” theory of investing. I have not talked to my friend recently. Hopefully they exited the condo casino pre-2007.


It should be noted that some speculation can appropriate and beneficial to both the developer and the community at large. Jack O’Neill and Southgate Corporation are the example that comes to mind. The benefits derived from their efforts have had enormous positive impact on Newark and Licking County. More on that later.


My daughter’s sixth grade teacher would not let her cite Wikipedia as a source on research assignments. Something to do with accuracy. Regardless, there is a great quote there about the Panic of 1837, “The American people with one consent gave themselves to an amazing extravagance of land speculation”.


While Thomas Sowell (see 1/24 post) does mention “flippers”, he lays most of the responsibility for the current real estate mess with the government. I am pretty sure there were many roads that led us here. The amazing amount of post-2000 speculative real estate development across America is surely one of those roads.

Friday, January 29, 2010

Alan Cottrill, sculptor





While doing some site acquisition work in Zanesville this week, I arranged the trip so I could again drive by Alan Cottrill's sculpture studio near the 6th Street bridge. You will recognize his two story 17,000 square foot building. It is the one with the Indian Chief Nemacolin standing athwart the roof with upraised arms and the seven foot tall mushroom hunter striding down the front walk.

The best part of the studio is Alan himself. A passionate artist, he shares his passion.


The second best part is touring the upstairs gallery. Amazing stuff.


By the way, the new sculpture of Howard Lefevre at The Works was created by Alan.

Do yourself a favor. It is well worth the drive.


Thursday, January 28, 2010

Friendship

I've talked a lot with my kids about the concept of being and becoming "a friend worth having".

Patrick Guanciale is a friend worth having. Thanks Pat.

An economist gets a bit testy....

Economic futurist (what a great job description) Jeff Thredgold offers a simple definition of economics, " people respond to incentives"


His January 27th newsletter opines that the President, Congress, and governments in general are working overtime to create disincentives even as they wonder where the job creation machine went.


Read it here.

Wednesday, January 27, 2010

Jim Rohn

I know there must some people whose internal drive is so strong and so consistent that they do not need outside stimulus or help to keep moving forward. I am not one of those people.

In the very late 70's, as a struggling young real estate agent, I had the good fortune to hear a lecture at a "success seminar" by a guy named Jim Rohn. His morning talk revolved around what he called the Five Major Pieces to the Life Puzzle. I would like to say it was a life changing experience, but I can't. I can call it a life influencing experience. His five major pieces to life are philosophy, attitude, activity, results, and lifestyle.

Rohn talked most about philosophy, about "the set of the sail". The winds of life, both ill and favorable, blow on us all. It is the set of our sail, or how we think about and respond to what is happening, that determines where we go and who we become. Of course, the wind frequently changes direction and so we must change as well.

"Learning to reset the sail with the changing winds rather than permitting ourselves to be
blown in a direction we did not purposely choose requires the development of a whole new
discipline. It involves going to work on establishing a powerful, personal philosophy that
will help to influence in a positive way all we do and all that we think and decide."

As a result of that seminar, I became one of Nightingale-Conant's best customers. Having now a library full of cassette tapes (technology change has a downside) and CD's by folks like Earl Nightingale, Wayne Dyer, Tony Robbins, Zig Zigler, Napoleon Hill, Denis Waitley, Roger Dawson, Brian Tracy, and of course Jim Rohn.

I'd like to say that I'm making progress on establishing that personal, powerful philosophy. I am working on the set of my sail.

In December, Jim Rohn died at age 79. A bit belatedly Jim, thank you.


Tuesday, January 26, 2010

Alvin Lee and David Brooks


Tax the rich and feed the poor
Till there are no rich no more?



For all the times I've heard Alvin Lee and Ten Years After's great rock song I'd Love to Change the World, I never heard the question mark after "rich no more". Lyrics here. I always wondered what the plan was after the rich were taxed out of existence.


David Brooks, a favorite writer/thinker, offers his take on populism and elitism here.

Monday, January 25, 2010

Hubble Telescope



While in Chicago one winter day, we stopped by the Field Museum. On exhibit were about 100 pictures from the Hubble Telescope. Mind blowing. The questions arose, "How much can we know?....How much should we know?" The answer came back, "Not so much". In many ways, not having to have ALL of the answers is pretty liberating. Simple reverence and awe are often good choices.



Full gallery of pictures here.

A Poem for Monday

Kahlil Gibran's The Prophet must have had teenage children.

And a woman who held a babe against
her bosom said, Speak to us of Children.
And he said:
Your children are not your children.
They are the sons and daughters of Life's
longing for itself.
They come through you but not from
you,
And though they are with you yet they
belong not to you.
It is always good to be reminded. Read the rest of the poem here.

Sunday, January 24, 2010

Thomas Sowell's The Housing Boom and Bust

offers an easy-to-understand synopsis of some of the causes of the current mess in the residential real estate world.

"When it comes to the home mortgage market boom and bust, who was
to
blame? The borrowers? The lenders? The government? The financial
markets? The answer is yes. All were responsible and many were irresponsible.
Economics cannot explain such things. For that, we must turn to the
politics of housing."


Sowell brings to our attention that "creating affordable housing" was the mantra of many national politicians. After all who could argue with that? Sowell shows, however, that they were seeking a national solution to what was essentially a local problem, ironically created by local governmental land use dictums.

"Despite the widespread assumptions that governmental intervention
is the key
to making housing affordable to people of moderate or low income, history shows
that it has been precisely in the times and places where government intervention has been the greatest that housing costs have been the highest in absolute terms and have taken a larger share of average income..............

Even in coastal California, home prices were very affordable before the severe housing restrictions that began there during the 1970's........

....in 23 0f the 26 urban areas around the world where housing is rated 'severely unaffordable', there are severe land use restrictions under the heading of 'smart growth' policies.........

A study of housing costs, for example, found that land use restrictions in the name of 'smart growth' policies had added costs of more that $100,000 per home in fifty metropolitan areas"

Sowell's premise is that at the turn of the century it became the policy of the federal government to actively pursue "affordable housing" and to increase the percentage of "home ownership" by facilitating easy mortgage money and lax, or non-existent, lending standards. The implosion of the housing markets that began in earnest in 2007, be believes, is the natural consequence of such policies. He clearly does not think much of politicians and uses lots of quotes and excerpts from news articles to try and make us not think much of them either. Fans of Barney Frank and Christopher Dodd will not like this book.

If I am reading him correctly, Sowell warns us that expecting the government to solve the problem is probably a mistake. (If you are interested in ideas and quotations that Sowell values, click here)

"The current economic crisis itself grew out of politicians intervening in
businesses
and markets, making decisions for which they have neither experience nor expertise,
much less a stake......

Wonder what he thinks about "government health care"?

I suspect that Sowell is too narrow in his focus and analysis and that there are other prime causes to the current real estate problems besides the government. Maybe we will talk about some of those later.