Tuesday, April 29, 2008

It's all Perspective, after all.

As I listen and read about the real estate "crisis" my mind goes back to my earlier life in the pharmaceuticals business. I was working on the launch of a new HIV/AIDS drug, Sustiva. My company was invited to have a presence in South Africa, the epicenter of the epidemic ( then and now), at the World Congress of HIV/AIDS meeting.

There was a huge area set up in an exposition style to feature various Pharm companies and their products. The companies go to great lengths to fashion glitzy display booths that will catch the attention of the prescribers and other allied health professionals to the booth. These booths cost 100's of 1000's of dollars and compete with one another to be grander than the next.

One reporter for a world-wide publication made the comment that all around the convention center are people infected with HIV. They live in cardboard box shanties that are inadequate in protecting them from the elements. The average income of these people might be $200 per year. The cost of various antiretrovirals, protease inhibitors and other drugs that literally have the capacity to interfere with and stop the disease cold, is in the 10's of thousands of dollars per year. The writer went on to say that the people living in the shanty towns with HIV would love to "live" in the display booths used by the pharmaceutical companies to display thier varied medicines. However, that dream was as unattainable as their hope of receiving the life-giving drugs. Their lives were subject to abject hopelessness and death when it came to consuming just a little part of the western lifestyle. The article made quite a ripple across the world and served to highlight the greed of the industry.

Here in Tallahassee and the rest of the USA we feel deprived if we are not able to move up to the 3600 square foot home with the 3 baths, hardwood flooring, decorative alcoves, book shelves, pool, granite counter tops, etc. When and where did it become the norm for us Americans to live like that? We have a standard of living, even in the sub-middle class, that is incomparable to the deprivation known across a huge part of the world. We chase the American Dream in waves. We buy a first home and then after a bit we move up and then up, and up, and up.

We lose the perspective of where we stand as compared to the rest of the world. The media is fanning the current housing crisis as if it is the end of the world. Here in Tallahassee it is pretty soft as compared to other areas. It is a wonderful time for buyers to attain the American Dream of home ownership. People can still sell their houses if they are able to relax their profit motivation a bit. It is all perspective.

People still need housing. It is a basic need. Real estate has gone through a correction and will return to some norm in the not too distant future. I know I will not have to sleep in a cardboard shanty house tonight and I do not know anyone in my family that will. It is all perspective.

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Sunday, April 27, 2008

Non prime Boll Weevil

Early in the 20th century in Enterprise, Alabama, life was good. Cotton was king and had made a lot of folks in Coffee County wealthy. They shipped more cotton around the world than most other locales. Then one harvest season the farmers went out to pick their cotton. They found that the Mexican boll weevil had made its way into Alabama and had stopped off in Enterprise. The weevil took about 1/4th of the cotton crop that year. The people rallied and dusted and sprayed over the next year and by the next harvest the weevil had taken 1/2 of the crop.

Folks began to be concerned. They held a meeting and decided that they would turn their attention elsewhere. They experimented with various new crops. Some planted corn, others soy beans, wheat, rye and so forth. It became clear that one particular crop seemed to flourish. That was the peanut. Simultaneously, a young chemist at Tuskegee Institute named George Washington Carver began to experiment with the peanut. He developed 26 industrial applications for the peanut and its by-products. Some few years later the farmers in Enterprise shipped more peanuts than anywhere else. They became wealthier than they had been before. The region is the largest supplier of peanuts in the world to this day. They hold a peanut festival in Dothan and elect a peanut queen every year.

In the town square of Enterprise there resides a one of a kind of monument. A large and majestic statue of a lady holding a plate. On the plate, in a prominent display, is a replica of the boll weevil. Written on the plaque are words to this effect: " We, the citizens, of Coffee County, Enterprise, Alabama erect this statue in great appreciation to the boll weevil, harbinger of opportunity."

What an interesting story. We find ourselves in a bit of a pickle in the world of real estate currently. Our boll weevil is, or was, the non-prime lenders who precipitated the end of a boom period in the business. It had to happen. We did not anticipate when or how it would play out but those of us in the business knew it had to happen.

Real estate seems to be the center piece in the overall slowing down of the economy. The 6:00 news has feature after feature on how bad it is all over. Admittedly, spring time has not brought about the sales numbers of the last few years here in Tallahassee.

So what happens next? People still need housing. There are still buyers and sellers who are a little more cautious than they used to be. Not in recent years has the professional in this business been more important to the process. To go it alone in this new economy is to put yourself at risk.

There will be those in this business who will adapt a new way of going forward. They will be successful and make more money than they ever have. There will be those who will fall by the wayside as they cling to their old habits and regimens. Mankind comprises the impetus that drives this planet for a reason. Better put, mankind is in charge because of the ability to reason, adapt and innovate.

Thursday, April 24, 2008

A nice home PRN

Hello. I am a new Blogger and this is my first Blog.

I would like to address a comment that my son in law, Galen made to me yesterday. He told me that he had a neighbor who was re-locating out of Tallahassee. They were opting to rent out their home " rather than take a loss on what they deem its value to be." Their hope is that the market will come back and they will recoup the investment that they have in the home.

We live in the midst of a market that is starting to settle after a major correction. We have seen property values in Tallahassee appreciate an amazing 10 to 15 % per year for the last 5-7 years. I have been a Realtor for 5 years starting my 6th year. My previous career was as an executive in the pharmaceutical industry. I came into this industry as it was climbing in the realm of the most robust "bull" run in its history. I overheard a lot of other realtors speaking about how long would they conjecture this to last. Most were of the opinion that the real estate bubble was a real phenomenon and the rupture would occur sooner than later. It has now transpired.

Where are we now? Amidst a relatively soft landing here in Tallahassee. Recent statistics put out by our Florida Association of Realtors suggests that Tallahassee homes in 2008 compared to 2007 have actually held their value and gained another 1-2%, on average. It is true that we are sitting on the top of a record inventory of homes, especially townhomes.

That is GREAT NEWS for people who have delayed purchasing a home until now. If you are at all credit worthy you ought to eschew paying rent for purchasing. Interest rates are right at 6% on a 30 year, fixed mortgage. Fact of the matter is because the inventory is fat and interest rates are relatively lean you can successfully make a good buy and escape paying rent right now. What does that advantage you? If for nothing else it would be smart to buy just so you can enjoy the benefits of your real estate mortgage interest as a tax deduction. Just how much of your rental payment is tax deductible. If you said NONE then you are absolutely correct. Think about it. If you are paying $1000 per month in rent, almost all of that on a relatively new loan is deductible as mortgage interest on your tax return. What does that mean in real dollars? If you were in a 10% tax bracket that would mean that you would save 10% of $12,000. Who could not stand to put an extra $100 per month back into their pocket? Do you like golf? How many green fees would $100 a month pay? Movie tickets? Meals in a Restaurant?

Now back to Galen's friend. He is all depressed because his home is no longer worth $200k. It is instead, more likely, worth $175-180k. I would be willing to bet that he paid, applying our 10-15% appreciation, per year math, somewhere around $115k for the home, 5 years ago. That is a mitigated SWAG application. Think about that for a moment. You have gathered about $60-65k in equity becuase you had the foresight to buy 5 years ago. Now you are hesitant to sell because you want to maximize your profits like your cousin, friend, ex-wife did. So you are going to rent it out? Ever drive a rental car? Notice how well people care for rental cars? The same applies to your home that you are going to rent out. It will be beaten up. Unless you are extraordinarily lucky or careful.

That home has provided you shelter for 5 years. It has provided you a tax shelter as well. Why not go ahead and sell it and get your equity out of it and move on. In your mind you have lost $20-25k on the house. Guess what. Now you are a buyer. You are moving to perhaps a part of the state or country where the bubble has done more damage than here in Tallahassee. You have cash in your pocket to buy another home. I would be willing to bet that you are going to make out like a bandit on your next purchase. You are going to be able to buy a bigger and better house than you had.

We read too much stuff in the printed media about the real estate crisis. We see all sorts of horrifying scenarios on the boob tube re: the housing melt down. It is all true. However, the steady head will make out, OK. If you hold property then you are still in the drivers seat. It is just costing us a little more to drive on down the road. $4.00 per gallon very soon. That is another subject.

It is going to all work out. Maybe not exactly as you would choose, but certainly in some fashion. It is never going to turn out as badly as you now think it is.