Thursday, November 8, 2007

A Dose of Fear

That was the subtitle to an Urban Land Institute Emerging Trends program I attended in Las Vegas at the ULI national conference. As I was headed into the office this morning I was listening to a story on NPR about the DJIA almost 400 point dive yesterday. The big talk in the story was about Morgan Stanley having to write down 2 billion or so dollars from the sub-prime mess. As I listened I felt very calm in a deja-vu sort of way. In fact, at the Emerging Trends program we heard it there first! Not about Morgan Stanley but about the broad credit market and how we are only 8 weeks (at the time) into a 2 or 3 year period of predictable instability. After that program I had a bad taste in my mouth. You know the kind of bad taste you get after taking some nasty "cherry" flavored cough syrup. The good news is now that I have "taken my medicine" I feel better. I know we are headed for more disclosure from various financial institutions about how many billions they are going to write off this quarter. Lets face it, times are looking bleak.
Too bad it took so long for the sub-prime mess to rear its ugly head. A dose of fear is just what the doctor ordered for investors pouring money into investments they do not understand - and that includes Wall Street, not just the little guys caught holding 4 houses when they can barely afford one.
When I did my market update this fall, I did not get it 100% correct. Things have declined a little since then and may in fact get worse. The questions are how much worse and for how long. I am an optimist. I cannot help it. I feel in my soul that we are in an opportune time to buy distressed real estate. Each deal needs to make sense (and cents) on its own merits. No more blind investing just because it is real estate. Here are a few ideas I want to share with you that may make you feel better. First, 80 million baby boomers are retiring in the next 20 years. This will not be a gradual event. Sure at first it will just be a trickle but in my opinion in the next 1-3 years we will see a wave of retirement analogous to drinking water from a fire hydrant. If you live or invest near the coast (any coast in America) AND within 60 minutes of a major airport, you better get on your wet-suit because the retirement tsunami is coming. Here in Southwest Florida I like to think we will see 1% of the baby boomers move or buy a second home here. I know it does not sound like much but a small sliver of a very large number is a very big number. In english 1% is 800,000 people. To put that into perspective our tri-county population is only 900,000. So our population will double just from baby boomers and that is not count the hundreds of thousands that will be needed to provide the necessary services to support the population. Another idea I want to share is our country is supposed to grow by another 100 million people in the next 30 years. Re-read the above and think about what I am saying. So there are maybe 15,000 houses on the market right now. So what?! Yes it is going to be painful to carry those houses and condos in the short run. In the long run (20-30 years) we will need another million or so homes. If you assume a linear population increase (it never happen that way, when it rains it pours) that is 50,000 homes and condos will be needed every year for decades. What will be different in the next 20 years from the last 5 is the majority of the new residents will not overpay for something here they can get in another state for half the price. Another fact is many of these people will prefer to rent instead of buy. Well that is it for now.
Take your medicine then tune out the news and be confident in our future.

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