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7/22/12: A Midsummer Investor’s Dream – Housing, Jobs, Consumer Confidence and Economics

Bad news for housing can be great news for investors.  But it means seeing a bigger picture and exploring the dichotomy of mainstream news and main street reality.  Alas, we thinketh such contemplations requireth aid.  But fear not!

Behind the microphones to help you sorteth it all out:

  • The Bard of broadcasting , host Robert Helms
  • Your Puck of pontifications,  co-host, Russell Gray
  • The Godfather of Real Estate, Bob Helms
  • Special Guests, former Chief Economist for the New York Stock Exchange and current Economics Editor for Barron’s Magazine, Gene Epstein
  • Special Guest, Director of  Economic Research for the Reason Foundation, Anthony Randazzo

We shall abandoneth the allusions of 16th century English soest thou may understandeth better that of which we are attempting to speaketh…

Long time listeners know that for each of the last three summers, we’ve headed to Las Vegas to attend Freedom Fest.  We always pack our mobile microphones grab interviews with some of the very interesting people we meet.  This year is no exception.

In this episode, we start out the conversation talking with Gene Epstein.  Gene is the former chief economist for the New York Stock Exchange and is currently the economics editor for Barron’s magazine.

Now, like most folks on Wall Street, Gene is a paper asset guy – stocks, bonds, mutual funds, REITS, etc.  And when Wall Street guys talk real estate, they don’t mean rental properties owned by individual investors.  That idea doesn’t compute for them.  But that doesn’t mean we can’t learn from them.  We just need to remember where they’re coming from.

What’s great about talking to guys like Gene is that it helps us see the bigger economic picture so we can put our mom and pop real estate investing into a broader context.  We’ve said it before and we’ll say it again:  what happens on Wall Street affects Main Street.  So main street real estate investors should be paying attention to macro-economic trends just like any other type of investor.  We do these interviews to help you do just that.

Gene starts the show off on a high note (not really), pointing out the US still has doggedly high unemployment and anemic GDP growth that is just “crawling along” at about 2% a year. Since GDP is measured in dollars and the Fed has been pushing the dollar down, you could probably argue that the economy is not growing at all.

Side note: We think GDP should be measure in terms of actual products produced.  After all, if you’re cranking out 1 million widgets a year at $10 each, your productivity is 1 million widgets.  Measured in dollars, it’s $10 million a year.  But what happens when inflation (a falling dollar) causes the same widget to sell for $12.00 each?  Now, measured in dollars, you’re productivity is $12 million a year.  Wow!  Your GPD “grew” 20%!  But did you really grow?

No.  You’re still only cranking out 1 million widgets a year.  So real productivity is flat. This means you don’t need any more space or people (get the real estate connection?).  The point is that the way we report GDP can be very deceptive and it’s easy to think an economy is growing, when it really isn’t.

Back to Gene…

He says the US economy is “not in a good place”.  But (and it’s a nice one), he doesn’t see a fiscal cliff or some similar financial apocalypse looming.   Whew.  We’ll cancel our advance tickets for the flight to Mars.

Gene says that we’re not seeing serious price inflation even though we should because “the Fed is printing money like there’s no tomorrow”.  Why don’t we see price inflation (yet)?  Because the labor market is weak and oil prices have dropped.

Hmmm….what does that really mean?

If the money supply is expanding (which is what happens when the Fed “prints”, a.k.a. quantitative easing), then absent an increase in productivity (making more stuff) prices should rise, right?  More dollars chasing the same goods equals rising prices…UNLESS some other component of cost goes down to offset the inflation (say…labor and energy).

Here’s the dirty little secret:  another way to increase productivity is to reduce labor costs.  That is, companies can be more productive by making more stuff with the same people, OR they can be more productive by making the SAME amount of stuff with LESS people (or at least less expensive people).

Of course, businesses would like to sell more, but the market decides that.  And if the market’s weak (it is right now), then businesses have to look for things they have more control over – like labor costs.

But what does that have to do with main street real estate investing?

Well, if business are going to continue to be squeezed by inflation, they might be forced to lay people off and/or move to cheaper locations inside or outside the United States.  If you’re a real estate investor, it’s bad when your tenants get laid off, can’t find a job, or the companies that employ your tenants (or rent your commercial building) decide to move away.  So yes, real estate investors should care a lot about these macro factors which are affecting businesses.

But an astute investor knows there’s a bright side.  After all, one town’s loss is another town’s gain.  That is, those companies and their jobs are going somewhere.   Your mission, if you choose to accept it, is to figure out where they’re going and to go there.

The first day of the due diligence seminar we just wrapped up was about  understanding the economic, geographic and demographic factors that affect the movement of people and money in and out of markets.  It’s something we talk about quite a bit during our real estate market field trips.

Meanwhile, Gene echoed something that 2013 Summit at Sea™ faculty member Peter Schiff has been telling us:  One of the unpleasant medicines necessary to heal the ailing economy is higher interest rates.

Actually, Gene didn’t say that directly.  But he meant it.  Because what he did say is that the U.S. needs to implement similar policies to those used in the early 80’s.  Since we’re old enough to remember the early 80’s, we know that interest rates were high.

It sounds counter-intuitive. After all, lower interest rates makes it easier to borrow.  Isn’t that good?  Maybe.

But lower interest rates punishes savers, especially when you combine it with a falling dollar (inflation).  After all, who want to save when the dollars are going down in value and the paltry interest earned isn’t even keeping up with inflation.  This is why Robert Kiyosaki says savers are losers.

But (obviously), if interest rates were to go up, it would create a host of ramifications too big to describe here. For anyone managing  big portfolio of debt (which describes most active real estate investors), then Fed policy is something to be watched VERY closely.  You can bet the lenders are paying attention.

As if all this wasn’t enough, when we’re done chatting with Gene Epstein, we get Anthony Randazzo on the microphone in this his second appearance on The Real Estate Guys™ radio show.

Anthony is the director of economic research for Reason foundation and he specializes in housing finance and macroeconomic policy.  Hey!  We were just talking about that.  Good timing.

Anthony is pretty analytical.  He spends his time researching statistics, analyzing data, drawing conclusions and making policy recommendations.  Then when we talk to him, he gives us the Cliff Notes version. It’s like being buddies with the smartest kids in the class.

Anthony points out that housing is (and almost always has been) flat when adjusted for inflation.  That means that houses, like other “hard assets” generally retain their relative value over the long term as the dollar loses its value.

Think about that one.

Today, it takes more dollars to buy a house and car than it did 30 years ago.  But it doesn’t take more house to buy the same amount of cars.


Let’s say you could buy 10 brand new cars for the price of one new house.  In 1970, that might be ten $4,000 cars to buy one $40,000 house.

But in 2010, it might be ten $40,000 cars to buy one $400,000 house.  Or vice versa.

The point is that relative to each other, the cars and houses retained their value.  It didn’t take more cars to buy a house.  The ratio stayed the same.  But it took a WHOLE lot more dollars to buy the car or the house.  Why?  The value of the dollar dropped.

Now, back to real estate.

Obviously, real wealth is built accumulating things of real value.  Even better when that thing of real value generates monthly cash flow. And even better, when there are tax breaks.  And even more better (we know, that’s terrible grammar), when you can buy it using borrowed money. And even extra more better (yes, it’s getting bad), when interest rates and purchase prices are low and income (rents) are up.

Yes, that time is now.

So, our two guests both agree that housing will be “bad” for the next few years.  We hope they’re right.  That means the sale will continue and bargain shoppers will be stocking up.

Now you know why we like to talk to all these economist types.  They cheer us up!

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