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International investments and Bubbles of Wealth

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Gary Scott

We’ll return shortly to our series on how to think and process information, but for a couple of days let’s look at real estate values and forces surrounding them. Let’s look at the real estate bubble, if there is one. If so, should we invest in real estate? What else should we do?

To begin…are real estate prices too high?

One great thing about real estate is that it is not very fungible. Fungible is the quality of sameness that allows one commodity to be traded or substituted for an equal amount. For example if you buy a share of Google or Ford or any listed share, each share has exactly the same value. You do not care which share you buy.  
So if the cost of a share is $300 and you buy it, the seller can send you any share of that company. This is not so with buildings and land.

This means we cannot say that all real estate prices are too high.

Take prices here in Ashe County for example. I recently bought some land here next to our farm at about $1,300 an acre. A nearby piece of land just went up for sale at $5,500 an acre. 

Is this new listing too high? 

Maybe, but a little further from us, someone is offering 65 acres for 1.8 million. This makes the $5,500 look cheap. Plus a few miles south, a house lot may cost a million dollars which makes all the Ashe county prices look low.

The reality is that real estate prices are dramatically affected by the three ions, location, condition and opinion, plus of course the seller’s need for cash. Perhaps the best we can say about a real estate bubble is that in some places, some real estate may be too high on a general basis. Yet even in those places, bargains will always exist. There will always be places where real estate prices are low, even when overall prices are too high.

Some fundamentals would suggest that real estate prices (in the U.S., at least), may not be as bad as they seem. The first of the fundamentals that supports a strong real estate market is the interesting demographic fact thatAmerica's census in 2000 showed that our population is getting younger. 

U.S. fertility had been falling. Then suddenly in the 80s it picked back up. It was projected the U.S. would have 275 million people by 2000. Instead the number was 281 million. This growing population supports higher real estate value and is part of the solution to the baby boomer and the American debt problem. 
America has created enormous debt. The US National debt clock showed debt at $7,844,835,232,477.98 or about $125,000 per US family.

Next decade, 78 million baby boomers begin to retire.  Someone will have to take care of them. The stress on Social Security and medical care will be profound. 
Boomer retirement begins in six years. Currently the federal government gets 47.8% of its revenues from personal income tax and 34.2% from Social Security, Medicare, etc. Boomers are the largest payers of this tax. Upon retirement they stop paying and start drawing out!

The government already spends 23.4% of its budget on social security and 19.1% on Medicare-Medicaid, nearly half of all expenditures. In six years how will they pay for 78 million, (mostly overweight) additional participants 

Without a wave of productive youth to take this load, the economic system will not work.

The new baby boom can help. Armed with new technology, these new workers will bring productivity that can run future governments and pay off government debt. 

Yet there is a gap. Boomers start retiring in 2012. The new wave of youth does not take hold until 2030, 18 years later.

In the short term the U.S. government may have to borrow plenty more. This may exert downwards pressure on the dollar.

In addition there is growing personal debt and real estate value problems relating to income that could force the government to spend even much more.

This added debt could push the dollar down even further before demographic change brings it strength.

This is one reason why the current real estate bubble may not be as bad as it seems (even if prices are speculatively spiked in some places). More government debt will push the greenback down and a falling U.S. dollar will create inflation. One of the best hedges against inflation is property ownership. A growing population also pushes real estate prices up. The nation needs more homes, more offices and more shops.

This is one reason we have been recommending real estate investments in Small Town USA . Small towns near big cities may see rising prices in the years ahead as retirees leave the city and move away from the crowds. More on this at How to Make Money Even When You Don't Want To.

This new wave of young Americans will create many other types of opportunity in health care, housing, pollution control, waste management, environmental control, etc. There are also some special avenues where it may make sense to place some of our wealth.

We’ll look at more of these opportunities in tomorrow’s message.

Until then, may all the value you find be high!


investment trends
International Investments that Sell
updated April 10, 2005
investment trends


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