We'll now apply the average ratio to the following chart's trend line.
The trend line is simply the replacement-cost value of durable goods times a fixed average ratio of 7.34.
The following was my basis for doing these charts and it also is my conclusion.
Government meddling in the free markets will not create prosperity. At best, it can only create a temporary illusion of prosperity, much to the dismay of those who felt it was real. In response to the malinvestments of the dotcom bubble, government meddling helped create an even bigger real estate bubble.
The good news is that we're back near the trend line. The bad news is that we're taking on an unprecedented amount of debt just to make things appear stable.
March 10, 2010
Record monthly deficit for U.S.: $221 billion
NEW YORK (CNNMoney.com) -- The United States dropped a record $220.9 billion further into the red in February, the Treasury Department reported Wednesday.
See Also:
A Grand Unified Theory of Small Business Malinvestment
A Grand Unified Theory of Stock Market Malinvestment
A Grand Unified Theory of Real Estate Malinvestment
Trend Line Disclaimer
Source Data:
FRB: Flow of Funds
I should mention that all of this data is pulled from "B.100 Balance Sheet of Households and Nonprofit Organizations".
ReplyDeleteWell, the only real investment is in value. There are still some good companies, stocks, bonds, funds, etc., that are solid. Not very many, mind you, which is why research is paramount. Fundamentals, that is all.
ReplyDeleteIt is the return of capital, not the return on capital, that is important. Any investment sufficiently leveraged will lead to ruin. We've seen that time and again.
As far as real estate goes, most of the people I know, and I know several, who made a whole lot of money investing in real estate all did it the same way. By buying large tracts of land on the outskirts of small towns, zoning them agricultural (lowest tax rate), then waiting for growth and development. When the land was worth ten times or more what they paid for it, then they sold. Since the upkeep was minimal and the taxes low, they made a killing.
People get caught up in the idea of housing, which really is only a small part of the equation. The real value is in the land and its location.
I'm going to give you some real deep inside information. The guy my mother bought our real estate company from was a multi-millionaire out of Minnesota. His family had been investing in this area since the early 1900s. In fact, his grandfather raised race horses for Al Capone in Mission, Texas. He used his proceeds to purchase tens of thousands of acres in the surrounding area.
If you leave Edinburg, which is the northern most town, and travel north to San Antonio on HWY 281, all that land you see on the left and right used to be his ranchland. He sold it off as time went by, but kept the mineral rights. See those natural gas pumps? That's a cool several million a year to his heirs.
So this is how you make money in real estate. Forget housing. These McMasions, what with their high vaulted ceilings and open spaces, no one thought to factor in the expense of cooling or heating, which is enormous. It's not just principal, interest, taxes, and insurance; it's utilities that are the downfall of many a man, when PITIU rapidly becomes Pity You.
Older homes are actually better designed, with their nooks and crannies. Energy efficiency was at the forefront. They stay cool in the summer and warm in the winter.
Moreover, they're sturdier. A house built in the 70s can withstand a hurricane. A house built in the 90s can't survive a thunderstorm. This is true.
The malinvestment is in the cheap construction and poor design of the house. Not to mention the fraudulent financing. Land, especially in a prime location, always has value.
The thing about real estate is this. You better have the capital and know what you're doing. Or you're going to go broke. It's as simple as that.
GawainsGhost,
ReplyDeleteOlder homes are actually better designed, with their nooks and crannies.
I hear that.
If I have one regret about my house it is that it has just one nook and cranny. It's my small home office. I have a little electric heater in it during the winter.
The house has two fireplaces, but they are pretty much just for show. They are on opposite sides of the house and there isn't even so much as a door between them.
Live and learn. That said, at least my house is paid off and I bought it before prices skyrocketed. I could be doing much worse.
Mark,
ReplyDeletethe last few post were very revealing. Good stuff. Gawains really knows RE, he better be careful his mom does not find out he is spilling the business secrets!
GYSC,
ReplyDeleteGawainsGhost already has me thinking that my two fireplaces don't have a door between them. I'm almost afraid to know more! ;)
Honestly, I've thought about closing off my family room in the past just so I could burn a fire in there without trying to heat the entire house.
I've also got cathedral ceilings in the bedroom which makes it one of the hottest rooms in the house in the summer time.
It's not all bad though. I'm 6'3" tall. It's nice to be able to use a stair climber without having to hit my head on the ceiling.
Fortunately, I live in the Pacific Northwest. The temperature extremes are not that extreme. I can't imagine my house being located in the northeast or the south though.
Yeah, well, you guys want to know how we came to buy the most successful, indepently owned real estate corporation in South Texas? This is real deep inside family stuff. The original owner couldn't keep his hands off the secretaries!
ReplyDeleteIt's true. My mother, bless her heart, never went to college an hour in her life. She married my father after he got out of the Navy. He became a computer programmer and systems analyst in 1959; then when he was offered a job down here, designing the network that all the banks run on, he packed up his family and moved south. I was 8 at the time.
Well, we moved into this complex because it was the only one that had central air and heat, which my father decided he could not live without. My mother took a job as the apartment manager so they could get free rent.
The millionaire developer from Minnesota who had built the complex, then decided to open a real estate company (as a tax shelter no doubt). The original office was the condo I live in now.
My mother started out as a secretary, got her real estate license, then her broker license, and promptly proceeded to work her way up to vice-president. The apartments were converted to condos, of which my parents bought two, and the office was moved to a large building downtown. By then my mother was making more money than my father, who had worked his way up to president of the computer company. Go figure.
Anyway, in 1979-80, I was in my first year of college at UT Austin. I came down to visit on Thanksgiving and before leaving I decided to take my mother to lunch. As I picked her up, I noticed the owner and the secretary walking out of the office. She had her hair up in a bun.
About an hour later, as I was dropping my mother off, here came the owner and the secretary, only now her hair was down. I asked my mother if she had noticed.
"She combed it out," she said.
I looked her right in the eye and asked, "Combed it out or f*cked it out?" It was the logical question.
"You don't think!" Hey, I don't know, I wasn't there, but I do know this. There isn't a woman alive who takes the time to fix her hair in the morning just so she can comb it out over lunch.
Well, it turned out I was right; they were having an affair. And it wasn't the first time; the previous secretary had been fired because of indiscretions with him. So my mother walked into his office and said, "I run a real estate company, not your brothel. Either you sell me this company or I quit."
He dared her, and she quit. And every other realtor in the office walked out with her. Now what? This guy has a real estate company with all of these listings and no realtors. He had to sell it to her. There was no other way out.
So she bought it, paid a quarter million in 1980. Then cornered the repo market shortly thereafter and promptly built it into one of the most successful companies in the area. She was elected president of the local board five years in a row. And today she's one of the most respected brokers in the state.
I didn't get into this business until about nine years ago, when my father was dying of cancer. Gotta stand up and do what you have to do to help the family, responsibilities of the first-born son, that sort of thing, you know.
But it was an easy transition, because I grew up in it. All of my life, since I was a child, I've met investors, developers, bankers, brokers, serious people with serious money. I paid attention. Who made money, who lost money? And why, that's what I want to know. Now that I'm in the business.
As far as your house goes, Mark. Yeah, I'd wall up one of those doors. Energy efficiency is money. That was the first thing I did when I moved back home after my father died, close an unnecessary door.
And my mother wonders why my electricity bill is a couple hundred dollars below hers next door every month. You'd have thought she'd have paid attention all of these years, but apparently not.
Gawains,
ReplyDeletesure your last name is not "Corleone"?! Your mom sounds tough as nails.
GawainsGhost,
ReplyDeleteGreat story! Thanks for sharing.
I don't even have a door to wall up. Seriously. You can walk from one fireplace directly to the other one without even going through a doorway. There are just 3 doors on the main floor. One is to my home office. One closes off the laundry room. The other is the bathroom. That's it. No door in the kitchen, dining room, living room, or family room.
It isn't as bad as it sounds. My power bills aren't that outrageous. The Pacific Northwest has a fairly mild climate. My power bill (natural gas and electrictity) was $1,928 for the past 12 months, which isn't all that bad considering I have a 2800+ square foot house and I'm home most of the time. It's about $160 per month on average. In theory, I split that cost with my girlfriend. In theory she's going to need a job again at some point though.
If you are interested, here's a bit of my background. It was the first post I did when starting this blog. I just need to avoid doing something really stupid with my nest egg and I should be okay. I've been rather fortunate so far, but it's been like walking a minefield.
My Investment Background and Initial Thoughts
Well, you can only do what you can do. That's the thing. There really are only two things you can do with real estate--sell it or improve it.
ReplyDeleteI get these houses all the time, from people who wanted to make their houses unique. Problem is that the paint scheme, the floor plan, the additions are only important to them. When it comes time to sell, they can't find a buyer.
That really is the problem with all of the flip-this-house nonsense. Not everyone's taste is the same. It's far better to go generic, appeal to the widest audience, than it is to go specific.
But, hey, as long as you bought your house to live in it, do whatever you can, what you want with it. It is your house after all. At the end of the day, someone will pay good money for it, as long as it's not too indiosynchratic that is.
As far as my mother goes, yeah, she's a slave driver. Especially now that she has nothing to do but work. She wakes up every morning around 4:00 AM, starts working and doesn't stop until around 8:00 PM, when I make dinner. She eats, falls asleep, wakes up and starts all over again. And there is no end to the amount of work she can come up with for me to do.
It is what it is.
"Women and children can make mistakes, but not men."--Don Corleone
"Never go against the family, Fredo. Never."--Michael Corleone
I'm with both of those guys on that. Men do what they have to do. Women do what they want. This is the difference, and it is real.
Not that I'm complaining about it, since I'm rich. But still it is frustrating at times.
Cool first post, I had never checked it. I had to read my first one now:
ReplyDeletehttp://tinyurl.com/ylhxhno
Sept 28, 2007:
"I have bee a huge fan of blogs for a while, and now have started my own. The purpose of this blog is to highlight and discuss the major disconnect between the picture of economic strength and well being that is being paraded out in the media and by our elected officials, with what the average person sees for themself with their own eyes. I will also throw in snippets of things that interest me (Sci-Fi, sports, space, fishing) and link to the very best of the web which exposes what is going on in todays complicated financial world. If you have come to this blog, welcome!"
HA!
Of course my second post was about inflation being understated.
GawainsGhost,
ReplyDeleteNot everyone's taste is the same. It's far better to go generic, appeal to the widest audience, than it is to go specific.
When we were looking to buy the house we specifically told the real estate agent that we were not interested in the color mauve.
He spotted a house we might like one evening and took us to see it the following day. We had to laugh when we saw it.
They painted it mauve.
He said we didn't need to see inside but we were already there and simply could not resist.
As we entered, we became overwhelmed by the mauve. It was literally the House of Mauve. Everything, and I do mean everything, was that color. The countertops were mauve. The carpet was mauve. The blinds were mauve. The interior paint was mauve.
It was SO worth the experience though. I chuckle every time I think about it.
GYSC,
ReplyDeleteThe purpose of this blog is to highlight and discuss the major disconnect between the picture of economic strength and well being that is being paraded out in the media and by our elected officials...
We both started our blogs just before the you know what really started to pile up on that fan. If nothing else, we can safely claim we saw it coming.