From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for November 2012

“5 Economic Trends to be Thankful For”

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First, I hope everyone had a great Thanksgiving! For those of you who in countries that don’t share our festival of thanks, I hope you had a great Thursday!

Kuddos to Neil Irwin, writing in the Washington Post yesterday.  I agree 100% with his list, and wanted to reproduce it here:

1.  Household debt is way down.  Neil lists this as his first item, but I would suggest it has plusses and minuses to it.  On the plus column, we really WERE over-debted as a society.  On the minus side, changes household debt carries with it complex implications for the consumption side of GDP, as well as corporate investment (see my prior blog post) and even trade relationships.  Nonetheless, this is, on net, a good thing.

2.  The cost of servicing that debt is way down — as Neil points out, from 14% of disposable income in 2007 to 10.7% today.   Of course, remember that one person’s interest EXPENSE is another person’s interest INCOME.  Nonetheless, this constitutes a significant wealth transfer from people who HAVE money back to people who NEED TO BORROW money.

3.  Electricity and natural gas prices are falling.  It’s hard to find a downside to this one.  From last year, consumer natural gas prices are down 8.4%, and electric rates are down 1.2%.  I would add to Neil’s analysis that more of this money is staying at home — the U.S. is well on its way to being import-neutral on energy.  Of course, this has some geopolitical implications, which we’ll deal with on another day.

4.  Businesses aren’t firing people.  While unemployment remains high at 7.9%, at least the arrows are pointed in the right direction.

5.  Housing is dramatically more affordable.  Neil points out that in 2006, the typical homebuyer faced a payment equal to 41% of the average wage of a private-sector worker.  Today that’s 26%.  This is a combination of both lower house prices (which proportionally lowers down payment requirements) and lower mortgage interest rates.

Congrats to Neil Irwin and the Washington Post for an insightful and timely article!

Written by johnkilpatrick

November 23, 2012 at 9:33 am

Corporate Investment — Much ado about…. something

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I can’t believe it’s been a month since I posted — I’ve been traveling almost constantly the past few weeks, and between that and the elections, my dance card has been fairly full.

The trigger for day’s post was an article in the Wall Street Journal on Monday, “Investment Falls off a Cliff”, with obvious homage to the impending fiscal cliff.  I don’t want to minimize the danger of the “FC”, and in fact all bets are really off if the worst case scenarios come to pass.  Here at Greenfield, we don’t really believe Congress and the White House will both fail to blink.  Nonetheless, “keeping your powder dry” is always good advise in perilous times.

I’d like to comment on two things, though.  First, while direction of corporate investment isn’t good, it’s not quite “double dipping” just yet.  Indeed, one might argue that the current downswing in investment is nothing more than seasonal backing-and-filling.

courtesy, Wall Street Journal

Note that after coming out of the recession, overall investment spending took a brief respite in early 2011, as well.  Of course, equipment and software appear to continue healthy, but structures are dragging the overall index down.  Part of this can be explained by the relaxation of the apartment construction surge that we saw over the past several quarters.  Many analysts now believe the demand-overhand in apartments is close to saturation (or at least satisfaction) and this sort of slow-down is neither unusual nor unhealthy.  Note that the NFIB optimism survey is still trending upward, although the Business Roundtable CEO survey (which surveys heads of larger firms than the NFIB does) had turned downward.  I suspect that’s a rebound effect — small businesses are still clawing their way out of the recession, and are less affected by what may happen if the FC becomes reality.  The larger firms were the first to enjoy the fruits of the recovery, and would be the worst hurt by tax increases and the FC cutbacks (particularly in defense).  Nonetheless, both of these sentiment measures are well off their 2009 bottoms.  Consumer sentiment, which ultimately drives much of this, is as good as its been since before the recession.

Second, I’m concerned about the negativity spreading to real estate.  Note that real estate investment comes in three flavors — development, capital gains, and income.  The downturn in investment has SOMEWHAT negative implications for the first.  Real estate developers will have to be more careful in a slow-down environment, but that’s been true throughout this recovery.  Financing is difficult, even in the “hot” apartment market, and so admittedly the commercial real estate developers may be in for a tough run.  (Residential development, on the other hand, is rebounding nicely.)  Capital gains is a “long game” anyway.  Certainly the tax changes which seem inevitable in 2013 and beyond have negative implications for the buy-and-sell crowd, but the returns to those who can hold thru cyclical downturns have always been healthy even after tax considerations.

Real estate income (primarily REITs) may actually be benefitted by a slight retrenchment in development.  If and as the economy continues to rebound, offices, warehouses, and shopping malls continue to fill up.  Lack of new supply (from a cyclical downturn in development) benefits the sort of existing structures which are typically part of a REIT portfolio.  As always, investors will be benefitted from looking at good managers with top-drawer properties and a history of increasing FFO.

Written by johnkilpatrick

November 21, 2012 at 10:35 am