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
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
the Ashe county
prices look low.
The reality is that real estate prices are dramatically
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
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
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
2000. Instead the number was 281 million. This growing
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
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)
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!