From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for May 2018

Boring stuff for a Sunday morning

leave a comment »

Any reasonably good education in finance or economics will include a discussion of the term structure of interest rates.  It’s important to understand — in normal times, short term rates (both borrowing and lending) are lower than long term rates.  However, these rates move all over the map, and at times the relationship can be inverted, as it was back in 2000 (see below).

U_S__Treasury_Yield_Curves_-_v1
(By Farcaster – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=66130747)

 

Why do these rates move around so much, and how can they become inverted (yes, that IS illogical)? Ahhh…. that’s important, but still terribly boring. In general, there are three theories — market expectations, market segmentation, and liquidity preference. Today, I’m interested in the third. In short, in times of trouble, investors (that’s you and me, by the way) want to stay liquid. As such, shorter term rates are artificially pushed down and longer term rates pushed up. The 2011 experience is an example.

So why is this of interest (pun intended) on a boring Sunday morning? Because I made the mistake of reading the news this morning, and happened upon a story from Quentin Fottrell of Marketwatch.com, reprinted in Yahoo Finance (yes, THEY’RE still around!) titled “Americans are hoarding money in their checking accounts — and that could be a problem.” In short, yes it could. To quote, “When times are good, Americans feel confident by keeping little in checking, but when times are difficult consumers store money in checking accounts, effectively pulling back on spending on retail and restaurants.” It’s an excellent article, and I highly recommend it.

Written by johnkilpatrick

May 27, 2018 at 8:10 am

Collapsing Price of Alternative Energy

leave a comment »

Most — nearly all — of our work is in real estate, but energy has a huge real estate component, so major shifts in the energy market have significant implications for real estate investment.

A recent report out of Lazard reflects just such a major shift.  Specifically, among five major sources of energy, wind and solar are now the low-cost alternatives.  Indeed, since 2009. the cost of solar energy (at a utility scale — not just what’s on the roof of your house) has declined by 86% to about $50 per megawatt hour.  Coal, for example, has declined in price only 8% during that period, and is now $102/MWh, or double the cost of solar.  Wind is even cheaper, at $45/MWh.

Thanks to Lazard for the accompanying graphic.

Lazard estimates

The implications for real estate are obvious. If and as utilities shift supply sources, and focus on alternative energy to meet increasing demands, there will be an accompanying demand for solar farms, wind farms, and new transmission lines.  Accompanying this, we’ll probably see a decreased utilization of coal mines, and certainly a reduced demand for new coal mines.

Written by johnkilpatrick

May 9, 2018 at 8:39 am