With money dirt cheap in the early part of this century and the stock market still reeling, investors searched for stores of value. The concept of storing value, hedging against inflation and depreciation is nothing new. For age’s gold along with other precious metals have been seen as such. In the US following the late 1990s dot com boom and bust investors sought out commodities and land. Raw land and traditional commodities are basically the same with both having little to differentiate themselves (ie corn is corn, raw land is raw land) except with properties the population shifts from the northeast to the southeast and southwest added an extra bonus, a fundamental backbone to valuations. In other words retirees and families looking for a fresh start saw these areas as fertile ground, capital investment adjusted and therefore the demand experienced a strong pull.
Pouring over US Census data your author found some interesting figures. He originally thought this would be the case but actually finding such data proved the theory. The following are states. The figures denote their current population ranking, the state, the estimated 2000 population and the percentage increase in population growth between 1990 and 2000. Your author used a 15% increase in population as the cutoff mark when organizing the list except with the top four, which have remained in their location for the past twenty years.
1. California 33,871,648 13.8%
2. Texas 20,851,820 22.8%
3. New York 18,976,457 5.5%
4. Florida 15,982,378 23.5%
10. Georgia 8,186,453 26.4%
11. North Carolina 8,409,313 21.4%
15. Washington 5,894,121 21.1%
20. Arizona 5,130,632 40.0%
24. Colorado 4,301,261 30.6%
26. South Carolina 4,012,012 15.1%
34. Utah 2,233,169 29.6%
35. Nevada 1,998,257 66.3%
36. New Mexico 1,819,046 20.1%
39. Idaho 1,293,953 28.5%
45. Delaware 783,600 17.6%
It should be noted that for the years reviewed Vermont was the only state to experience a retraction in population that was -5%.
Upon reviewing 2006 figures it was determined that California’s population has already increased by 10% and totals 36 million. The same percentage increase or more were also found in Georgia (9 million), Arizona (6 million) and Utah (2.4 million). It should be noted that the US Census expects Florida to outpace New York in population by end of this decade. Florida’s population increase was between 8-9% from 2000 to 2006. New York has only experienced a growth of less than 5%.
This weekend your author found scores of articles that confirmed to him we are experiencing the first break in the housing market. The reader should remind themselves that every market whether it be gold, stocks, bonds, commodities, currencies or real estate has a rally, a continuation, a consolidation and finally a sell off. Trees don’t grow forever and rallies have a finite timeframe. The events that lead up to the crash from the Dutch tulip mania in the 1630s, the 1929 crash or the dot com boom are all the same. Charles Kindleberger’s Manias, Panics and Crashes: A history of financial crisis lays it out for the reader.
1. An ample supply of cheap money. The federal reserve’s action during the late 1990s and into the new century was ever apparent as interest rates fell to historically low levels.
2. Often times it is a new found technology. In the case of real estate the actual underlying asset (home, land) had been ignored during the stock market appreciation experienced in the 1980s and 90s or at least had appreciated at a much slower pace.
3. A willing and enthusiastic media. The reader could not open a newspaper without being reminded that the housing market was growing. The popular financial news network CNBC gave daily accounts on the housing market just as they had with hype surrounding the dot com boom.
4.The final stage occurs when a person who has never been involved in a particular market suddenly offers their advice. In regards to real estate your author was told by a first time homebuyer, who would later sell their home, that now was the time to get in and then proceeded to state why this was the case. As it relates to real estate specifically this same person also “reminded” the author that “you know you can always sell”. This last bit of their information was particularly troubling because unlike the stock market, real estate is not considered liquid by conventional standards. There is not always an immediate buyer unlike a stock transaction, which can be executed in a matter of minutes. Joseph Kennedy would say that he could see the Crash of 1929 when the shoeshine boy gave him stock tips.
Your author receives many solicitations through email that state lots in parts of Florida and Georgia that sold for a certain amount in the summer of 2005 are now selling for 10-25% lower. The most recent quarter numbers for publicly traded homebuilders WCI Communities, Lenar Corp, Centex, DR Horton Inc., Pulte Homes, KB Homes and St. Joe Development have plunged. Many developers have been reporting record levels of homes that have not sold.
The conventional thinking herd mentality has been asking when the recovery for such market has happened and that the landing has been a soft cushion. This is complete balderdash. The landing is far from over. Many homeowners and speculators tagged on home equity lines of credit (HELOC) and proceeded to make interest only payments. The truth is the majority of Americans tie their wealth to their homes. In other words it makes up for the largest portion of their personal financial worth.
While poking around the internet your author found some disturbing facts. Taken from the Senate testimony given to the Judiciary Committee in 2001 by Robert Manning, Research Professor and Director of the Center for Consumer Financial Services:
Three out of five families are responsible for the total $560 billion outstanding credit card debt. On a per capita as it relates to 2001, this was $11,000 per household. Furthermore total consumer debt is greater than the entire federal deficit and while unemployment has been at historically low levels, bankruptcies both Chapters 7 and 13 totaled in the neighborhood of 1.5 million in 2005.
Such states as Ohio, Michigan and Maryland may never see property values maintain their previous lofty levels. The patient and wise investor would be advised to look where the population growth is expected to continue, which will be in the southwest and southeast US. Unfortunately too many of our citizenry believe looking rich equates wealth or having obtained wealth, thus will not be joining you. Your author is reminded of some words that someone once shared with him, “no one ever got rich owing Master Card”. The dismal personal financial statistics will factor into the continual downward spiral in the housing market. Individuals and families who are overextended with their finances will attempt to sell their homes. This will be a difficult task as home inventory will be plentiful. It will then become a buyers’ market, where they control the price wangling and terms. With any type of a market it is during the sell off panics that the patient buyer and analyst will be justly rewarded.
Investing in real estate will probably be fruitful for those who can stand to have their funds tied to an illiquid asset. However location selection in the years to come will be much more crucial. The skyrocketing values of real estate didn’t materialize over night nor will their sell off and stabilization quickly conclude. Your author suspects that 2007 and 2008 will be prime years to make purchases as the bleeding from desperate sellers will probably have entered their climax stage, we are just seeing it now and in no way will a year make a difference. Rallies and sell offs can last for years, that hasn’t changed. As famed vaudeville performer Will Rogers once said “Buy land cause God ain’t making anymore of it”. Your author would agree except he would advise to use some discrimination.
