Unconventional Wisdom

I had lunch with an investor friend of mine on May 18 and we had a very interesting discussion about the economy in general, real estate prices/values and the stock market. First let me say if a man is measured by his friends then I am the richest guy in the world. Not only are my friends smart but they are generous with their time and allow me to probe their thoughts on what is happening but also why it is happening (in their opinion).

My friend sees the general economy as sluggish and thinks it will continue to be flat for some time. He sees much trouble ahead for the commercial real estate market. It may be because there is too much space and not enough tenants or consumers may not be spending enough to keep the tenants in place. Regardless, he sees cap rates heading back to the historic mean of 10%. In english that means retail/strip centers may fall as much as 40% in value from 2006 prices. Compounding the situation is many centers are not stable as in they are not 90% full and most are losing tenants such as Circuit City, Linens & Things and other bygone companies.

On top of that, rents are still falling in centers across America to entice tenants to move from one center to another. Plain and simple, the commercial market IS ugly and will get worse. I have to say I agree with my friend. With that said, I also have friends in areas that are not overbuilt and their centers are staying full and rents are stable but these are in less populated areas.

As for the stock market, I keep reading about how much cash is sitting on the sidelines ready to invest in anything that makes sense. I was talking to my friend about a graph someone sent me that showed money market deposits as a ratio of the S&P and it showed a monster amount of available cash. My friend pointed out how the graph misrepresented the actual amount of available cash because the S&P index is down by almost 50% since a year ago. Therefore there is not twice as much cash as a year ago as the graph indicated, it is more of a reflection of how the S&P is down. My friend really likes SRS (Super Short Real Estate Index) and I will tell you I am also a fan of SRS and I own it as part of my own holdings. All of my investor friends believe the stock market is over bought and we are in a secular Bear Market that just happens to be in a rally.

Back to real estate in general. One thing my friend has been saying for some time now is do not buy (for investment purposes) anything for a year or so. He believes the prices will be the same if not lower a year from now and the chance of further decline is just not worth the risk of marginal returns (rents) and carry costs such as taxes and insurance. In general I agree with him but there are always exceptions and one should keep their eyes peeled for those exceptions (i.e. some distressed bank own property for example). It also depends on why you are buying too. If you are buying to use for your own purposes, then there is no risk of lost expected rental income and you will pay taxes and insurance wherever you live or run your business.

In closing I hope everyone has a great Memorial Day weekend. Stay safe.

Back in the saddle again

I just got back from the Urban Land Institute Fall Meeting in Miami Beach. It was a very informative week with just about every real estate topic covered in multiple programs.

The three items I found most interesting are:
1) The new stimulus package being talked about in congress will be different this time with no checks going to taxpayers. Instead a hundred or so billion dollars will be offered to the states to speed up the funding of new infrastructure projects. The catch is in order for states to get the money, they will have to match all or a portion of the funds. No match, no funds!

2) It does not matter who is elected President, taxes will have to go up to repay all of the spending our country has been doing since the beginning of the Iraq war.

3) The bad news is the recession will last 12-18 months. The good news is we are about a year into the recession and improvements in our economy's outlook should be clear around next fall.

This financial mess we find ourselves in will lead to structural changes in lending for any type of real estate transaction. What has not changed is our country and the world is getting older. The world is also growing in terms of population. More people means more demand for rooftops. Here in the U.S. I learned we built about 1.2 million too many homes from 2004-2007. Based upon customary absorption models, the U.S. should fill those homes with new immigrants, college graduates and other new households over the next 12-18 months. Keep in mind the absorption rate I just mentioned will be an average across the nation so in some places like Lee County, Florida there is more like a 3 or 4 year supply of vacant homes while in other places (say Texas) there is a shortage of homes.

I do agree with both presidential candidates, our best days are still in front of us. Things will get better, is just not be better by tomorrow.

So that leaves us with a real estate market that appears to be on life support. Going forward, everything old will be new again.

Remember due diligence? Hey knowing what you are buying is cool again! Fundamentals matter! It feels good to be back in the saddle again. My comfort zone is to look at a deal without rushing, crunch the numbers, lower my expected selling price and raise my carry costs then crunch the numbers again. When the analysis shows my conservative numbers still make sense I feel like I am back my horse and riding high. The bucking bull is more exciting, but also much more dangerous.

I personally prefer the old fashioned way of real estate investing where fundamentals are everything and just like a horse, if I take care of it, it will take care of me. Happy Trails to you my friend!

Knock Knock...is Mr. Market there?

If you have been reading my blog over the last two years you know I am an investor at heart. I like real estate. I like stocks. I like to make money.

Let's be honest with each other, the last month has been full of gut wrenching twists and turns in the stock market and there is no liquidity for investors or developers to buy land or distressed assets. It seems as though even foreign money has left US investment markets.

If you watch the news all you see is everything wrong with the world, financially and otherwise. Remember September 11? Remember when the dow sank to 7600 in 2002? Remember the RTC (the predecessor to the 700B plan we have now)? No doubt about it, things look as bleak as ever.

On the other hand, we are still here right? We are still free citizens and we have our families. I would like you to realize not all is as bad as it appears.

As I write this blog on Friday morning, the dow started the day with a 500 point drop. Sounds like we are going from bad to worse...
Yet, at the same time, some banking stocks are RISING. Imagine that, some financial stocks are being purchased when EVERYONE knows the banking system is the last place you want to be right now.

Again, not everything you see and hear is as it appears. As I read what I have written I realize I do not have anything of substance to point to, other than the past 100 years, that proves things will get better. An investor named Benjamin Graham proposed a philosophy about investing that he called "Mr. Market". I want to talk about Mr. Market a bit here because I think it helps to put the stock market and the real estate market into perspective. Here is a direct link to a site that talks about Mr. Market in detail (http://www.buffettsecrets.com/mr-market.htm).

Essentially Mr. Market is a crazy fool that shows up on your doorstep every business day to make you an offer for your stocks or other investments. You can choose to listen to him or slam the door in his face. Either way, he will not be offended and will be back tomorrow to make another offer. Some of his offers are insanely high while other offers are incredibly low. Oh, I left out one important fact, Mr. Market is crazy. In fact, you would be wise not to listen to him at all!

Would you go to an insane asylum for advice on investing? Hell no! If you own a quality investment feel free to listen when Mr. Market offers a great price. However, please realize just because Mr. Market is offering you a high price does not mean your investment is worth that much. Sometimes you are better off to sell when the crazy man offers you a price that cannot be justified.

The point I am trying to get across to you is the market IS crazy. Yeah I feel like dirt too when I see one or all of my stocks being traded for less than what I paid for them. I am sure you do too. If you invested in some penny stock(s) you may never see your money back. There are many stocks, thousands of them in fact, that are down because of fear. I bought a stock for 9.30 that pays 1.87 per year in dividends. That stock is now trading at 7. I think it will be bid up in price over time (at least I hope it will) but until that day, I still get a 20% dividend every year.

Take a look yourself. There are great companies that make real money and pay real dividends for crazy (low) prices. At some point soon we will see a bounce off the lows we are seeing this week and surely into next week too. By bounce I do not mean the dow will be at 12,000 by Halloween but the market will recover. There will be some catalyst (I have no idea what it will be) causing the market to move back up.

Remember, Mr. Market is crazy and should not be consulted on value issues. Keep your chin up, try to stay positive and spend some time with you family...unless of course Mr. Market is a member of your family...