How rising values influence our markets


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This presentation goes all the way back to the original real estate purchase in the US and then runs fast forward to today's market. Along the way, the concept of rising values over time is well supported by history and demographics. So sure, we have our problems dujour yet over time, they too will be nothing but another historical footnote on the road to the future

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  • This recession has certainly had an impact on housing prices
  • In virtually every area, values have fallen and in some areas, by significant amounts
  • Housing certainly seems to be risky business
  • At least that’s what they’re telling us on the news
  • They say we had a bubble and that now it’s popped
  • Foreclosures are common
  • And buyers are sometimes negotiating directly with the bank
  • They call them short, but they’re quite the opposite
  • Short or long, there’s enough to go around
  • The bailouts have helped
  • Still many are sinking
  • And some are all the way under
  • It’s not a pretty picture.
  • And as a result, people wonder if a home is the right place to put their money.
  • This is a new perspective though, for a look back at the history, tells a different story
  • Sailors from the old world discovered the “new world.”
  • That changed quickly and deals were made. Critics still argue to this day whether this ever really occurred or if it was ever really understood. While it may have seemed like a good deal for both sides at the time,
  • One can wonder whether the original deal makers could ever imagine what that first transaction would lead to and how happy they would be if they could see Manhattan now.
  • So in reality, either side has plenty to be happy about.
  • Imagine if you could have told the original participants in this deal that the piece of paper they were signing would someday trade for thousands of times more than the cost of the land itself?
  • Manhattan was but a tiny sliver of the tribal area which stretched from Maryland, through New Jersey, Pennsylvania and upstate NY to Connecticut border. The population was only about 24,000.
  • As incomes grew, so too did the size and makeup of our country. We can’t really draw correlations to the cost of the original purchases for there were many extraneous geo-political factors but it is still interesting to look at something like the Louisiana Purchase in 1803 which doubled the size of the US at the time and for the cost of only 15 Million dollars. This is less than what some individual apartments sell for in today’s New York City. The population at this time was estimated at 97,000. There were other great deals like the purchase of Alaska from the Russians for less than 2 cents an acre or the Mexican Secession which included what became California, Arizona, Nevada, Utah and more - price wise, I believe it’s less than what Oprah paid for her pool house.
  • And then you have really expensive homes like this one owned by the Mrs. Spelling that went on the market for 150MM. That’s more than all of the separate purchases that assembled our entire country- We of course have not adjusted for inflation in and if so, the numbers would be dramatically different but how many sellers or buyers do you know that think that way? While they should as it can help them to make better decisions but the point of this is simply to show in a grand way that despite short term setbacks, prices have only gone in one direction as our country and population grew.
  • Immigration was and still is a factor in population growth.
  • And growing populations fueled the birth and growth of cities
  • And some of those new Americans obtained jobs building those cities, ever larger and ever higher- This continues today.
  • Just over the last 50 years the population has doubled from 150 to 300 Million
  • Each year, the population increases by 3MM people and with an average of 3 per household, that’s a million new homes that are needed every year.
  • Manhattan went from looking like this, to looking like this
  • From a sparsely populated new land to quite the opposite in just a few hundred years. As bad as things may sometimes seem at the moment, a few years are nothing but a drop in the bucket of history.
  • Next to population growth, income growth is arguably the next most important factor in rising real estate values
  • We see in this chart, that there are periods of great disruption and turmoil yet over time, that per capita income has risen steadily over time
  • Over many years we transitioned from a predominantly agrarian society to an industrialized one
  • And as our territories grew and prospered, so too did the means for traveling amongst them.
  • Factories provided work beyond that needed for self sustenance
  • Women joined the workforce and started bring home paychecks
  • Today, women are not only in the workforce but achieving powerful positions
  • And not only has their participation and power increased but they are proving themselves highly capable of performing tasks previously deemed inapproprate.
  • Continuing its ascent, income rises and with it, the ability for more to own their own homes.
  • For those that made the investment early on
  • And that have held on over the years- have made their mark not only on the books but in their personal financial well being.
  • Yet, it’s not always a straight line up. There have been periods before that have deteriorated property values. There are more myths than fact regarding these and to this day, people allow the emotions instilled by events long ago to impact their decisions today even though the circumstances may have changed completely.
  • Perhaps the single worst period for home values and ownership. Most of those with mortgages lost their homes. The attitude that loans are bad still persists today yet all the rules have changed and banks can’t “call” your loan simply because they want their money back. You have to miss payments, default and be subject to foreclosure before you lose your home and looking at current efforts to stem this tide, we see the changes that have occurred since this much darker event.
  • War. It’s easy to understand how this can be a negative influence on housing yet it can go the other way too as this country saw one of the biggest building booms ever after the end of world war II.
  • Tensions created based on the unknown or near war situations can be just as bad
  • Yet, the threat of war doesn’t stop the need for everyone to have a place to live.
  • Changes in leadership and the resultant crises, victories or fundamental global changes that come with it can influence the markets yet still, never really change the need for shelter.
  • More recently, we’ve seen terrorism strike repeatedly within our borders. This can roil markets and in some ways, may have even helped to trigger more residential investment as people gravitated towards family and home-
  • Turmoil in the financial markets can sap wealth and healthy retirement plans in just days
  • It’s happened before, and it will
  • Happen again.
  • Taking a look at just the last 4 or 5 decades, we’ve seen many such disasters and most of these are isolated within our own country.
  • Yet trough this same period and despite all of these presumably negative events, real estate values rose steadily
  • As we can see, appreciation will vary from year to year and can even go down- yet the averages over time are quite healthy
  • This will vary by region and vary even further by state yet from the lowest to the highest averages, all equal healthy appreciation over typical periods of ownership.
  • And values have risen over time despite the peaks and valleys of inflation ….and unemployment
  • The same can be said despite mortgage rates peaking over 18% and averaging well above where we are today
  • If we take a look at what this appreciation can mean on an average monthly basis, it’s pretty surprising. Now, no one is mailing you a check for this of course, but over time, it is the average benefit received for the price levels used here.
  • Boiling a lot of these elements down such as price, rates and income, we see the percentage of income used to purchase a median priced home. Surprising to many is that it’s not just a sales pitch but a statistical fact that it’s never been less expensive to purchase a home than at any time in the last 46 years.
  • Some will yearn for the good old days when you buy a lot for building for just a couple hundred dollars
  • Or as time went on, a couple thousand
  • The opportunities we are looking at right now will likely be looked at in the same way in the future.
  • Infrastructure continues to deliver more people and things to other places
  • And to do it faster than ever before
  • Cities continue to grow
  • Our society advances and with it, the earning potential of more and more people
  • We see the banking world change from S&L’s
  • To Fannie and Freddie. And though they have their problems now- they are still likely to be responsible in the future for the vast majority of home loans
  • There are always going to be those that only see the problems
  • And then there will be the few that understand the important concepts and opportunities when they appear
  • As the market changes
  • So some will struggle
  • While other seize the day
  • And it takes more than vision to make prognostications. You have to also be willing to thought of as being a little crazy. Calling a bottom in the stock market of just over a year ago when you others like famed economist NourielRoubini AKA Dr. Doom had all the attention of the press. As we look at what the Dow Jones Industrials have done since the crazy man’s call vs. what Dr. Doom had predicted, we can see pretty clearly that it’s more often the popular opinion and the consensus that’s wrong.
  • And it takes more than vision to make prognostications. You have to also be willing to thought of as being a little crazy. Calling a bottom in the stock market of just over a year ago when you others like famed economist NourielRoubini AKA Dr. Doom had all the attention of the press. As we look at what the Dow Jones Industrials have done since the crazy man’s call vs. what Dr. Doom had predicted, we can see pretty clearly that it’s more often the popular opinion and the consensus that’s wrong.
  • So never be afraid to stand out from the crowd. It might be 6 months, it might be a few years but at some point sooner than later, your clients will thank you
  • Everyone knows what is said about hindsight, but it’s foresight that’s the rare commodity.
  • And it’s from a clear understanding of history and the factors that have influenced it that the best basis for foresight is derived. We see what our markets have done, yet over time, it’s not a stretch to see where they will likely to continue to go and it’s those that have this vision to look forward that will make the best decisions for themselves now.
  • How rising values influence our markets

    1. 1. Certainly – this is the grand daddy of let’s just see how that works out using historical rates of return
    2. 2. What Factors Influence Value and Rate of Return?
    3. 3. NYC Population9,000,0008,000,0007,000,0006,000,0005,000,0004,000,0003,000,0002,000,0001,000,000 0 1790 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
    4. 4. “a lie told onceGoebbels said thatremains a lie but a lie told athousand times becomesthe truth”.
    5. 5. The Great Depression
    6. 6. Knowledge Society Industrial SocietyAgrarian Society