"I don't get no respect. I told my landlord I want to live in a more expensive
apartment. He
raised my rent!" --
Rodney Dangerfield
Well, that's right to the point
-- are rents going up or down? Are apartment prices going up or down?
Interdependent good samaritans
I applaud those who are
apartment builders, buyers, brokers or lenders. It's important to recognize
that people who deal in apartments are interdependent with tenants and could
qualify as good samaritans. If not for those who build, buy, finance and
broker rental units, up to 40 percent of San Diegans could not afford a place
to live without doubling up with parents, friends or strangers. We would have
two and three generations living under the same roof as in much of the world.
What's the alternative to
renting? Owning a home. Today payments on the median priced home exceed $2,400
per month. The average apartment rent is about $1,200 per month, or half the
cost of owning a home. The typical $1,000 security deposit is not even in the
same ballpark with the $10,000 to $60,000 down payments (3 percent to 20
percent) required to buy a home. How can landlords rent them so cheap?
The lady or
the tiger: Is inflation or deflation ahead?
We are like the legendary
suitor in Frank Stockton's story, standing in the arena looking at two doors,
knowing behind one is a beautiful lady and the other, a savage tiger.
Obviously, the choice is critical.
Inflation or deflation
uncertainty is reminiscent of President Truman's endless search for a
one-armed economist. His advisers irritated him by saying, "on one hand
inflation may drive prices up ... but on the other hand ..."
On the one hand, the Obama
administration is doubling the number of dollars in the world spending $9
trillion, more money than all presidents from George Washington to George Bush
combined. When injected into the economy, will there be a doubling of the
number of homes, apartments, automobiles, doctors, health care, etc.? Or will
there simply be more dollars chasing too few goods and services resulting in
runaway inflation? A trillion trips off the tongue too easily. One way to look
at this incomprehensible number is a "trillion" seconds ago no one on this
planet could read and write -- Ancient Greece or the Roman Empire had not come
into existence. Now relate seconds to dollars and multiply that by nine!
Zimbabwe $10
trillion bill
I have a real $10 trillion
bill. If simply printing dollars (nowadays done electronically) was the
solution to recessions, then Zimbabwe -- where everyone is a multi-millionaire
after 11,000 percent inflation -- would lead the world. Zimbabwe's Federal
Reserve Bank took John Maynard Keynes' advice that the more money the
government spends, the richer everyone will be. Every dollar the government
taxes or borrows to stimulate the economy, however, is a dollar unavailable to
the private sector. It's a wash -- no net benefit to the economy.
Now, on the other hand, what
about deflation? One measure of San Diego's last real estate recession was the
assessor writing down nearly $16 billion in property values between 1991 and
1998 -- an eight-year period. Last month total assessed valuations reportedly
dropped for the first time in 25 years. If the recent boom, which peaked in
2005, is any indication it looks like 2013 or later before a full recovery.
August unemployment rose by
only 216,000. Well, there are six government categories of unemployment, U-1
to U-6. The media published U-3, and national unemployment was 9.7 percent but
U-6 puts it at over 16 percent. The Bureau of Labor Statistics also reports an
official Household Survey that showed 1,044,000 jobs lost last month.
Unprecedented, this indicates things are far worse than anyone thought.
Wholesale prices have had the
sharpest drop in 62 years. American consumer prices have had the first annual
decline since 1955, and for the first time ever, Social Security recipients
will get no cost of living increase in 2010. Prices in France, Germany,
England and Japan are falling in a worldwide deflation. Japan's stock market
is still down 75 percent after 19 years of stimulus plans and infrastructure
spending.
It's counterintuitive but some
economists liken booms to a disease, like ballooning Elephantiasis, and
depressions or recessions are the cure, the needed antibiotics to restore
health. While depressions make the whole community poorer, some are enriched
(falling real estate prices are a godsend to buyers). Gross rent multipliers
on apartments have cratered from 15 times gross to 9.9 as irrational
exuberance crumbles. Expect apartments to be cheaper next year while actually
costing more. If prices settle around 7.5 times gross dropping from $106,661
per unit there will be less spendable even at $85,000 when higher interest
rates kick in.
What causes
real estate booms and crashes?
If nothing else note, mark and
remember well this basic premise. Increases in money and credit cause booms.
Contractions in money and credit cause recessions. Booms are impossible
without an expansion of money and credit to pay for across the board price
increases -- impossible without government interventions. Presently the
Federal Reserve (our central bank) is trying to re-inflate the economy by
flooding the banks with oceans of money. Banks, in a panic, are not loaning
out the money as they prepare for $200 billion or more in commercial loan
defaults expected in 2010 and 2011. Those loans booked in 2000 and 2001 coming
due. Today, economists predicting deflation before inflation are the most
persuasive. Inflation is not on the horizon. Ultimately, the choices will not
be between a Lady or a Tiger, but a savage tiger and a roaring lion.
Forewarned is forearmed. No illusions, just least bad options ahead. Knowing
what to expect alleviates anxiety, lets us sleep at night, and gives us an
inner peace in the midst of calamity.
As a reminder on how we got
here I saved a 2008 ad: "Wachovia Bank offers a $25,000 down payment "gift"
provided you finance your new home loan with Wachovia." Wachovia purportedly
was required to donate $2 billion in homeowner assistance as the price of
government approval for acquiring World Savings. Homebuyers with no money
down, have no money to lose from walking away from their loans.
Those who
can carry a message to Garcia
The times demand the salesman
who can carry a message to Garcia. In 1898, at the outset of the Spanish
American War, President McKinley needed to get a message to Garcia, leader of
the insurgents. An aide said he knew a man, Rowan, who could deliver the
message, if anyone can. The president sent for Rowan, handed him the message
saying, "Take this to Garcia."
I'm not going to detail how
Rowan put the message in a pouch strapped over his back, sailed for Cuba, put
in a rowboat off the coast in the dead of night, barely avoided capture, and
spent three weeks in Cuba's jungles to deliver the letter to Gen. Garcia. My
purpose is to stress that Lt. Rowan took the letter and didn't ask who is
Garcia, where is he, how do I find him, why do you want to send him a letter,
or why not send Joe? He just delivered it!
"Civilization is one long,
anxious search for just such individuals," wrote Elbert Hubbard in his famous
essay, "A Message to Garcia." "No employer can afford to let such a person go.
He or she is wanted in every city, town and village, every office, store and
factory. The world cries out for such people and they are needed and needed
more than ever today."
Real estate brokers, builders
and apartment buyers are just the people who can "Carry a Message to Garcia."
