Comments on: Recession and Recovery

By: Carl from Chicago

Carl from Chicago — Tue, 20 Oct 2009 03:01:28 +0000

I think you guys did a better job of explaining my post than I could :)

By: david foster

david foster — Mon, 19 Oct 2009 17:52:57 +0000

In 2005, Mike Mandel (BizWeek’s chief economist) argued that “savings” numbers were being distorted, because adding a new rec room to your house counts as savings, but investments in education and R&D do not. My thoughts here:

http://photoncourier.blogspot.com/archives/2005_01_01_photoncourier_archive.html#110574833885162127

By: Mitch

Mitch — Mon, 19 Oct 2009 13:49:16 +0000

Perhaps we are just looking for our “excess capacity” in the wrong places. A manufacturer’s excess capacity is an idle machine or an empty truck. For a service provider, excess capacity is someone filing for unemployment.

By: Marty

Marty — Mon, 19 Oct 2009 03:06:06 +0000

Real estate, at least non-residential, could be productive capacity if there are productive equipment and people to put in it without emptying almost-as-good real estate nearby. “Capital” is plant plus equipment, then you add the people to make it work.

But in the last decade or so it was all out of whack, essentially a lot of speculative real estate investment — “speculative” meaning the investor was just taking advantage of a rising asset type but not an investment in the sense of also creating the other things needed to make it profitable. Someone else was supposed to do that.

Except, in the bubble, that didn’t happen, so we are way over-built with real property that lacks a productive occupant.

And the govt seems intent on re-inflating the real estate bubble, while if any intervention made sense it would be to stimulate (hate that word, now!) the other needed assets: equipment and trained people. Which you could do with some temporary tax changes for depreciation and training.

This does not imply or require a simple-minded thought that it has to be manufacturing— a floor full of CAD machines and their users could be viable if someone needs a bunch of design work done.

But, other than reflating the bubble, the other thing that won’t work is trying to pick winners and losers (e.g., “green jobs”). Give some tax preference to a broad class of things like tangible equipment and training expenses, and then get out of the way.

By: david foster

david foster — Sun, 18 Oct 2009 23:13:18 +0000

Phwest…since railroads are (collectively) a network, it seems likely that even those lines that were unprofitable on a stand-alone basis contributed to some degree to the success of the overall network.

And just as the progress of science depends on experiments that *fail* to demonstrate the experimenter’s hypothesis, the progress of the economy must involve some % of failed “experiments.” It wasn’t always possible to predict in advance which lines would be successful and which would not.

By: Shannon Love

Shannon Love — Sun, 18 Oct 2009 22:41:30 +0000

Phwest,

I would disagree with the conclusion that real estate malinvestment is somehow different from “business” malinvestment.

Misallocation of resources is misallocation of resources but the difference between misallocated productive resources and misallocated residential real estate is that residential real estate represents terminal consumption.

Terminal consumption means that the resource is not used to make another resource but is instead consumed. A lot of people by and sell food products as its makes its way through the food change but only the person who eats it represents terminal consumption. Likewise, a lot of people by and sell things related to residential real estate but the people who use it for housing are the terminal consumers.

Overbuilding productive assets is inefficient but it usually doesn’t actually reduce over all wealth because there is relatively little terminal consumption. Those productive assets are still there and can be used or repurposed. By contrast over built residential real estate, especially real estate that has been made overly upscale, can’t really be used or repurposed. Once you’ve put in your granite cabinet tops and Italian tile in the bathrooms, you can’t do anything else with it.

It’s basically the difference between buying to many hammers versus blowing the same amount of money on a fancy meal. You can find some useful purpose for the extra hammers but the meal is just memories and fertilizer.

By: Tatyana

Tatyana — Sun, 18 Oct 2009 20:08:53 +0000

It is often forgotten that real estate (commercial and as consequence, residential) is built in expectation and in service of other business(es). Any property owner should have learned by heart the sentence:”the house is not an asset, it’s a liability”. It is true on a bigger scale, to, even for rental properties: because (as we -painfully-know it here in NY) – when an industry or a few industries that is the major provider of money goes down, all the sub-industries that were serving the needs of the major ones go bankrupt.(restaurants and farmer’s markets – to feed, garment workshops and fashion shows – to clothe, nightclubs, opera-houses and XXX-sex toy stores to entertain, etc etc). So the need to house – in better, more cleverly-designed and built spaces – nosedives, too. In NY, those major industries are Finance and Advertisement; in Michigan – it’s automobile manufacturing. No difference, in principle – and it looks like we have outlived our usefulness, in both states.
As this industry forecast predicts, current situation in construction has not reached the bottom. But it doesn’t talk about the root of the problem, again. It is repeating the same attitude pre-recession, as if the building/construction is a major money-making industry in itself, not merely a service for bigger guys.

By: phwest

phwest — Sun, 18 Oct 2009 19:43:22 +0000

I would disagree with the conclusion that real estate malinvestment is somehow different from “business” malinvestment. To pick a classic example, the over investment in railroads in the 1800s that drove a number of the boom-bust cycles of that period resulted in the building of lines that could never recoup the investment made to build them, and also lines abandoned in construction that were never completed. This is not fundamentally different from the current real estate bust – assets have been built that will never recoup the investment made in them. Some value was extracted from bankrupt railroads by operating some of the assets after bankruptcy, and some value will be extracted from bankrupt strip malls in the same way.

Now you could argue that the relative magnitude of malinvestment is different this time around – that might have some merit, I don’t know the relative numbers. But I disagree that the difference in kind is meaningful.

By: Michael Kennedy

Michael Kennedy — Sun, 18 Oct 2009 18:41:57 +0000

I live in Orange County, CA and, in 2005, was considering remodeling my house. In the midst of this analysis, I decided to look at what was for sale in the area, reasoning that moving might be more desirable than going through a major remodel. It was shocking to see what the prices were. I looked at one home in Laguna Niguel, near my home in Mission Viejo, that was listed for 1.2 million dollars. It had the original 1970s kitchen and bathroom cabinets! We looked at a new community called Ladera Ranch, that is to the east of Mission Viejo, and saw astonishing prices for homes on tiny lots with ten foot deep back yards. I cancelled my remodel plans and hunkered down for the inevitable crash. If I had been really prescient, I would have sold my house and rented as a few other people did at the time.

This community, Mission Viejo, is probably in better shape for the long run as it was built out in the 70s and the lots are large. The real excesses seem to have passed us by but there are neighborhoods in Ladera Ranch, built after 2000, which have 1/3 of the homes in foreclosure. My son has a number of friends living in these half empty neighborhoods. Those homes will sell for half of the prices eight years ago when they do sell. It will be years before the homes not in foreclosure can be sold and these are young couples who move around for jobs. This is a disaster and most of these people could qualify for the loans. I can only imagine what other areas look like.

By: Mrs. Davis

Mrs. Davis — Sat, 17 Oct 2009 21:34:30 +0000

That’s why it’s so hard to find a house built in the 1930′s. But now we’re smarter.

By: Shannon Love

Shannon Love — Sat, 17 Oct 2009 21:34:15 +0000

The other problem is that money spent on unneeded real estate is money not spent on productivity enhancing technology or skill creation.All that money that went into more square footage than people really needed, bamboo flooring and granite cabinet tops was money not spent more productively.

I used to watch some of those house flipping shows and I was dumbstuck at the idea of people paying $850,000 for a two bedroom bungalow in California that was worth well under $150,000 in the rest of the country. I kept thinking how many computers, machine tools or technical classes you buy with the 600,000 difference.

By: TMLutas

TMLutas — Sat, 17 Oct 2009 21:29:51 +0000

One thing that might speed up the filling of these empty units is a realistic examination of what are the barriers to occupancy and then lowering the barriers. Access to credit, taxation, and regulation are the classic barriers and of the three, refining and reducing regulation to be less burdensome is probably both the easiest and the least likely course to a faster recovery.