May 25 2009

You Can’t Lose in Real Estate – Hmm…

“Real Estate cannot be lost or stolen, nor can it be carried away.  Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” – Frankin D. Roosevelt


The economy of the Southeastern U.S., where I live, has been fueled largely by real estate transactions for the past ten-plus years.  From my travels throughout the U.S., I believe this to be the case in most regions.  Just about every individual, company, or organization has derived income or at least some degree of financial gain from the sale of residential or commercial real estate.  In addition to the agents, bankers, attorneys, architects, engineers, contractors, suppliers, truck drivers, etc. who are reeling because of the crash, now city, county, state and federal governments along with hospitals, schools, development authorities and everyone in between is feeling the pain.


Even worse, countless people who financed the purchase of a house over the past two to four years now sit on an upside-down mortgage.  This of course means that they owe the bank or mortgage company more than the house is worth in the market place.  This is a problem for the individual and the bank and it highlights another problem.  Not only have the banks loaned money for single-family residential real estate, but many have also loaned billions of dollars for luxury multi-story condos and residential developments that are now worth a fraction of what they were valued at just a few years ago.


I mention all this not to depress anyone further, but because I believe real estate can be a good place to invest once again (eventually), but not if speculation continues to be as prevalent in the future as it was over the past five years.  Real estate will only gradually increase in value if a large percentage of the purchasers intend to occupy or utilize the properties and can legitimately afford to meet the loan requirements.  When it seems like everyone you meet is flipping real estate for a profit, you better stay clear because it is only a matter of time before the bubble will burst.


Along with real estate, the broader global economy is in shambles too, and this is largely because we ignored basic business fundamentals – namely real value creation.  Over the past 10 to 15 years, many of the brightest minds rejected careers in science, engineering and corporate business and instead chose finance for a shot at the big time on Wall Street.  They learned quickly and helped develop extremely innovative and complex derivatives and financial models (see for more insight).  Mostly what they did was manipulate and game for their own significant gain – instead of contributing to the process of creating value.  There is certainly a place for finance, but real value creation comes from the goods being manufactured or the services being provided – not super complex derivatives that hedge or leverage and make a few individuals extremely wealthy while wiping everyone else out.


So once again – we have the opportunity to rise from the ashes.  Hopefully we can learn from our foolish greed and “irrational exuberance” and avoid another global economic disaster for the next fifty years or so.


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