Perspectives in Real Estate; “And the Good News is….”

Perspectives in Real Estate; “And the Good News is….”
Commentary by Gregg Fous

Oh how short our memories are; or how young we are: Back in the 1980’s almost every major bank in the US was in big trouble and would have had to file for bankruptcy had not the government given them time to write off their loses. The S and L crisis was devastatingly real. In the 1980 the prime rate was 21% and inflation was 13.5%. (See 1980 news flashback). I remember buying a few investment properties back then and being thrilled to be able to buy two REO properties and getting a five year fixed rate at 12% (The paper was held by the bank that wanted to unload the property)!
Today I can’t turn on the news without hearing about Countrywide, Indymac, Freddy Mac, Fannie Mae and the troubled banking industry. Foreclosure tours, people out of work, and the largest bank crash in recent history are water cooler talk of the day.
The Indymac news is not good (Click here) or is it? For instance, do you realize the bank will actually reopen on Monday as Indymac Federal bank? The Feds will begin to market the bank to get it back into the private sector starting next week. In my mind that fact that this bank has been “rescued” by the Feds so quickly is good news.
The economic run we had since the 1980’s and it’s near banking collapse is staggering, but who would of thunk it back then? Sometimes we can’t see past the end of our empty wallet, or our short order backlog, or our bleak short sighted forecast.
Folks, when I get up in the morning I choose to be optimistic and I challenge you to do the same. Sure times are tough: Oil prices, food prices, impact fees, and job losses are all taking their toll. But amidst all this there is good news, sometimes very hard to see from your own perspective, but there are ways for us all to benefit, in the long term, from how we all respond to the current economic crisis. The good news is how we as Americans ultimately respond to the current economic crisis.
On the Indymac situation: the depositors succumbed to fears about the bank collapsing and caused the bank to collapse. The collapse, in turn, elicited a swift and decisive response from the Feds. They took over the bank, assuring the safety of the deposits. Furthermore, I believe the government will not allow the collapse of Freddie Mac and Fannie Mae. The storm will be tough, but we will weather it. We may see a few more failures but the resultant belt tightening and restructuring of the banking industry and its loan practices will have long lasting, positive effects.
Indeed it is how we respond and react to these tough economic times that is the most important thing. We will evolve into a stronger, more stable economic base, where logical growth will prevail over irrational exuberance.
So what’s the good news in all this? The banking debacle should not have been a surprise, and the good news is that we are already in the correction, the fix, and the appropriate response. I will say that I believe that we have perhaps over corrected in the short term in the banking industry. We have over tightened lending requirements and shut down profitable segments of the business along with the unprofitable ones. But this over correction will swing back around and the end result will be good, sound banking. It hurts us now, but we needed it.
Our responses to other bad news is, well, good.
I have referred you to this link before but the law of supply and demand is worth revisiting. The law predicts that the price level will move towards the point that equalizes quantities supplied and demanded. This law is the reason we will never run out of oil. This law is also the reason that all the vacant homes in Cape Coral and Lehigh will be purchased.
Here are some of our good responses:
• Belt tightening. Doing more with less. Economizing where possible.
• Price adjustments. Move prices down to meet demand.
• Protect the core. Protect the family, shelter, provide food. Move down to Maslow’s base needs.
• Fix what broke us. Lax lending; overleveraging; irrational purchases; and poor long term planning.
• Go back to basics. Offer sound service; take no short cuts; and take all the steps needed on the path to success.
• New Business models are developed based on the above. New opportunities like virtual offices, urban living, economical transportation and housing, and in-fill projects. Look for changes where manufacturing facilities are placed, how houses are constructed and their size Look for a “New Conservatism”
• Investing in property now at prices that are below replacement costs. Buying distressed land and development opportunities for a mid-term hold.
Less than good responses
• Opportunistic flash in the pans. Taking advantage of short lived opportunities and building a long term strategy on them is wrong. Just as building a long term strategy on making money by flipping rapidly appreciating homes was wrong yesterday, so is it wrong to build a strategy on short lived businesses like foreclosure tours, buying and selling REO’s, and selling bank paper.
• The Ostrich approach. Don’t hide your head in the sand. Take remedial action now. Talk it out. You are not in an exclusive club right now. Get out and find solutions with your network of business and social networks.
Let me mention just a few of our “problems” and comment on the good news:
Too many houses on the market. What we really need to look at is the number of vacant homes on the market; these are the “overage: we need to fill. Prices have now dropped to a low of around $80/sf. At these prices the houses are selling. As the selection gets “slimmer” the prices will climb again. After all, builders cannot duplicate these homes at these prices. These homes are bargains in today’s market. Housing is now affordable. Lee County is now attractive to retirees again. This is good news.
High Gas Prices. The response from most Americans is to drive less (consume less gas) but I am sure we will get accustomed to these prices and this response will be tempered somewhat. The good news is that Americans now need to live closer to work and more of the infill housing will sell and get occupied. Some other good news: Look for more local distribution centers, more manufacturing near consumption, and more mass transit. Look for the long term response in automobile design. TIP: It is easier to drive 20% less than sell your gas guzzler to save $100/month on gas by paying another $5000 for an “economical” car.
Hard to borrow money. The banks are in an over corrective mode now, but this over correction has brought more logic and sound investing. This is good news.
Food prices High. Most of these price increases are related to high energy costs and high corn prices. (See ethanol production and food costs article) It is hard to see the good in high food prices, but I believe the good you will see will come out of how we respond to these high food prices. The law of supply and demand will curtail some of these increases and now Americans are adjusting their shopping habits and food consumption patterns.
Jobs hard to find. This is tough one to see any good in, but again, the response we have to this is what will be the positive spin. Lower wages attract more employers. Loss of jobs encourages more entrepreneurism. It hard to tell you that your job loss is good for the economy, just as it is hard to tell the tree that burned down that the fire was good for the forest. But macro economics will prevail.


I am optimistic about the responses we will have in Lee County to the current economic situation. But, will Lee County Commissioners implement a stimulus package by waiving impact fees? Why not waive them for all infill projects where the infrastructure already exists? How about mass transit, will we promote this? Will the Airport Tech Park get an added economic boost for completion? How about removing some of the red tape for new businesses?

In the final analysis, it is how we respond to adversity that is more important than the adversity. It is in our repose that we will see the solutions. We need to be proactive in our own destiny. We need to take action, look at the long term results and look for the good news in everything.

Gregg