Tuesday, September 1, 2015

Own vs. Rent - Why is it a financial decision?



Own vs. Rent – Why is it a financial decision?

As the real estate markets continue to recover, I read with fascination those reports touting that renting may be a better financial decision than buying, or vice versa, based on the dynamics of various MSAs and sub-markets.  The entire focus is on the cost effectiveness side of the equation. 

This type of cold-blooded financial analysis saddens me.  I have often considered buying a house as a process similar to buying art.  Buy it because you like it, because it makes you feel good, because it is a representation of who you are.  That does not mean that economics have no place at the decision table.  However, to boil down the process to a pure dollars and sense analysis misses the true point of buying a house.  At the end of the day, you should buy or rent based on the dynamics of where you want to live.  Is it close to schools and shopping?  Are you comfortable with your commute?  Do you like the neighborhood? 

While these choices are the same regardless of buying or renting, there is one other factor that is not the same.  How long do you plan on living there?  Renting is a more transient form of accommodation that owning.  You are usually not putting down permanent roots.  Even if an upwardly mobile family will only stay in the same home for 5 – 7 years, you usually do not find renters staying in the same apartment for such a long length of time. 

Whether people will admit it or not, everyone has a social impact to the community in which they live.  If you rent, you are more likely to have a short term perspective.  As such, you may not care to contribute as much of your time or resources to the growth and vitality of your community.  And, at the end of the day, isn’t that the real reason why we choose where to live?  When you ask someone where they live, how often do they identify themselves with their dwelling versus their neighborhood?   

If you feel a sense of permanence in your residence, you are more apt to take a larger interest in the growth of your community.  By extrapolation, if you find that you are invested in your community, won’t that, in turn, strengthen the neighborhood values, resulting in capital appreciation to your home?  I know I am turning my argument into a financial case, but if analysts are going to truly compare the rent versus buy decision, shouldn’t this factor into the equation? 

We always have financial choices in everything we do.  And, as a home is usually the largest purchase a family will ever make, costs play a huge role in the decision process.  However, let’s recognize that the buy versus rent decision is so much more than just a pure financial choice.  It is a life statement.  In an apartment, you keep the boxes for the next move.  In a home, you leave them at the curb for recycling.  What is your choice?

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328

Wednesday, March 18, 2015

No Guts No Glory



No Guts No Glory

I would like to ask a question of the homebuilding community.  We often say we are interested in innovative product, plans, cutting edge technology and new design.  However, how many of you are willing to go that extra mile to deviate from the norm, to take a chance that may put your pricing above the market.  Will the market accept it, promote it and embrace it?  More importantly, will the market be willing to pay for it?  This is the $64,000 question.  

When a gamble works, you are considered a trailblazer, someone with vision who was willing to stick to your convictions.  You are recognized as an individual who not only has their finger on the pulse of the market, but has the uncanny ability to know what consumers want before they know they want it.  Like Steve Jobs if he had built homes instead of computers.  However, if you miss, you are considered a poor risk taker, someone who missed the market and did not recognize that you cannot sell what is not asked for.  Like what almost happened to Apple when Steve Jobs first left the company.

It is a fine line, and one which has no definitive answer.  I toured a top selling community the other week that has multiple builders and is located in a price sensitive sub-market.  Most product tends to follow tried and true layouts, and pricing per foot is fairly standard across the product segments.  Then one of the builders tried something different with a new product line.  While I would not call the changes radical, they are of a nature to be significant enough to be very noticeable.  Like test driving a BMW after looking at Fords and Chevys (sorry Ford and Chevy drivers.  No harm intended.)  It obviously carries with it an increased base price relative to competitive product, but you definitely get a home that feels more valuable than the other options available.  I am not talking upgrades here.  It is all about design, utilization of space and incorporation of light.

I don’t know if it will succeed or fail.  But I sincerely hope it succeeds.  I want to believe that homeowners will recognize value when they see it and will be willing to stretch a little further to invest in something that raises the bar.  I am not implying that all good ideas can sell at a premium.  However, it is refreshing to see an entrepreneurial spirit shine through now and again.  Regardless of what market research and consumer focus groups tell us, you never really know what will work until you can dedicate yourself to an ideal and have the courage to implement it.

It is good that Steve Jobs came back to Apple.  It is also good to see builders taking calculated risks with product and design.  But it is a gamble.  You may not be the next Steve Jobs.  But do you have the conviction to try?   

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328

Friday, March 13, 2015

A Contrarian Perspective



A Contrarian Perspective

The real estate business is very much an emotional business.  You can see it, feel it and touch it.  It tends to be an extension of an individual or corporation and is out there for all the world to see.   It is a tangible investment.  Whether a commercial property, vacant land or other form of real estate, it is something that has visual substance.  And no one like to make a mistake on something that everyone can see.

Back in the late 80s and early 90s, no one would touch office or hotel properties.  They were overbuilt, vacancies were high and no one knew where the bottom was.  It drove return hurdles to ridiculous levels and drove prices down to bargain valuations.  

During the most recent real estate bust, the same was true of residential real estate.  Land could be had for pennies on the dollar and the markets were littered with destroyed companies and little liquidity.

In both cases, people were afraid to make purchases and investments as no one knew where the bottom was.  Opportunistic investors swooped in and made fortunes with contrarian investment strategies, not worrying whether their purchase was at the true bottom, but feeling comfortable that it was at least low enough to guarantee a substantial return whenever the markets would improve.

A similar phenomenon is occurring in current homebuilding lending practices.  As many smaller builders went out of business in the last downturn, institutional investment dollars have now flocked to the more established large builders.  They are perceived as more stable with a lower risk of project failure.  This has resulted in the reduction of an important source of capital for new start-ups to take shape.  Without so-called country club money, new builders have limited access to capital.  

From a contrarian perspective, this creates a huge opportunity.  Consider the following.  If a project performs poorly, who is more likely to pull out, a new or established builder?  If a deal is unconventional, who is more likely to figure out how to make it work, a new or established builder?  When trying to latch on to new trends and innovations, who is more likely to react quicker, a new or established builder?  In all three circumstances, I would argue on behalf of the new builder.  They cannot afford for any deal to fail, they are more likely to think out of the box for non-standard opportunities and they have less red tape to jump through to adjust for innovation.  In an improving real estate market, these seem to be compelling, but overlooked opportunities.  Additionally, everyone loves a fresh face.  

I understand that there is fear that the real estate markets can falter again.  After all, it is an investment and investments move both up and down.  We tend to get scarred easily and those wounds take time to heal.  Except for those contrarians who recognize opportunity.  In an improving homebuilding market.  For new homebuilders.  

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328

Tuesday, January 20, 2015

Good to the last drop

Good to the last drop

I admit that I am no stock market expert.  So, I am puzzled when I hear that falling oil prices can have a negative effect on the economy.  I understand that a lower cost of oil detracts from fossil fuel exploration, that it negatively impacts the value of big energy conglomerates and that there is economic fallout to energy dependent countries like Russia and Venezuela, as well as energy based cities like Houston.  However, last time I checked, the remainder of the world uses oil.  Falling oil prices can only help the rest of us.

From a home building construction perspective, this benefit helps in two ways.  First, it reduces the cost to manufacture building materials.  A large number of construction materials are oil based products.  Second, there are large fuel savings for transportation of both labor and material deliveries.  While I do not see these savings necessarily being fully passed along to the actual home builders in an improving housing market, I do see these savings increasing the bottom lines of the construction trades.

Lower oil prices should, though, benefit home builders from a consumer purchasing perspective.  First, lower oil prices means lower gas prices which increases disposable income, allowing for a more expensive home purchase decision.  Additionally, lower gas prices increases the universe of community options for buyers, as distance becomes less of an issue with reduced travel expenses.  Both of these circumstances will lead to increased demand, resulting in higher home prices. 

Finally, we all know the trickle-down effect to the economy of home building.  As it touches so many industries, what is good for home building is good for the overall economy.

Now, I understand the concept that what is good for oil users is bad for oil producers, and that reduced oil pricing is bad for those economies dependent on fossil fuel energy production.  However, most people and industries are energy users, not energy generators.  I have to believe that both the short and long term benefit of reduced energy costs can only be good for the continued growth of both the housing industry as well as the overall economy. 

Remember, as housing goes, so goes the economy.  If we need less expensive oil to grease those wheels, how can that ever be a bad thing?

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328


Monday, January 12, 2015

The Chicken or the Egg

The Chicken or the Egg

What came first, increased land prices, or builders securing land positions for future growth?  It is an interesting question.  Common sense dictates that you should buy low and sell high.  Land should be purchased in a down market and held for market improvement.  However, no one likes to catch falling knives and few builders tend to buy sufficiently long term land positions as a core objective.

So, how do we then account for the current land purchase frenzy in an improving market?  It is actually a simple matter of limited supply and short term planning.  Each year, builders set projections for the next few years, constantly modifying projections on a quarterly (if not monthly) basis.  Now, the builder who has a crystal ball has yet to be born, which tends to result in planning decisions based on current conditions, not future conditions. 

As markets improve, builders are forced to increase staffing to support sales and construction growth.  In turn, they push forward increased projections to align with this heightened staffing and anticipated continued market strength.  Now, knowing that you require at least a 6-12 month lead time in land position to accommodate future needs, everyone starts rolling the same dice at the same time to increase land holdings to both satisfy future projections as well as to justify larger staffing levels, causing land prices to rise.

Then, to support these higher land values, builders start increasing home prices under the premise that markets are heating up so that home buyers are willing to pay more for a home.  Never mind the fact that inflation is flat and salaries may not be increasing.  This often has the unintended consequence of slowing down the sales market as pricing accelerates past the point of current affordability, resulting in short term dips in the heated land values that helped raise home prices to begin with.

This somewhat artificial growth in land values will tend to continue until the next true down cycle occurs, at which point builders start reducing their land positions so they do not get caught over-leveraged on land, causing land prices to either flatten out or decline.  The disappointing fact here is that this is exactly the point that builders should be loading up on land and preparing for the next upturn in the market.

Unfortunately, it seems that those that do not learn from history are doomed to repeat it.  With investment horizons for builders, lenders and non-opportunistic equity investors typically hovering in the three to four year time horizon, I see no end to this strategy of buying high and hoping for higher.  Chicken or egg?  It seems we have a history of continually eating the chickens and then wondering where the eggs have gone.

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328



Friday, January 2, 2015

Homes and Health Care

Homes and Health Care

I do not consider myself a Democrat or a Republican.  I believe in social services as well as reduced taxes.  I guess that means I care for the common man so long as the common man does not negatively impact me financially.  With that understood, I am perplexed by the current health care plan.  (How does this tie to real estate? – Bear with me.  I will get there!).  I was an original believer that a health care program for all was a good idea.  It just makes sense.  However, as rates re-set this year, I found an overwhelming need to cry foul.  A long, hard, loud from the rooftops foul. 

(This is where I tie in to real estate!)  If a developer sets up a HOA, they need to do their best to approximate yearly expenses before they can sell a single piece of real estate.  In fact, a sales contract is not valid without providing HOA docs and a disclosure statement noting yearly HOA fees.  On top of that, at least in the great State of Florida, a developer is limited to a yearly cap on how much those fees can be increased.  Additionally, if utilities or insurance companies try to increase their rates, they need to go through a regulatory review by the state which is usually accompanied by much kicking, screaming and back-room negotiations. 

These caps and oversight are all done with an eye towards the protection of the consumer.  It does no good for someone to own a home if they suddenly cannot afford the ownership expenses due to yearly increases.  This makes sense.  Obviously, this concept did not make it to Washington, where health care insurance costs have just gone up somewhere between 20% - 30% with no oversight.  It appears that the same powers that care whether you can afford to stay in your home, do not seem to care whether you can still afford to live there if you get sick.

They will tell you that, even though rates have increased, there are still plenty of affordable plans to choose from.  What they fail to explain is that those lower cost plans have much higher deductibles.  Therefore, if you have to change plans due to cost, and then get sick, you will find yourself with an out of pocket deductible that more than obliterates whatever savings you just achieved by reducing your benefits to a more affordable plan.

I have never been a fan of real estate regulatory oversight.  I feel that the actions of the few have caused unnecessary control over the actions of the many that do it the right way.  However, what is good for the goose is good for the gander, so they say.  The same controls put in place with an eye towards homeowner protection should apply to the health care industry as well.  It is a simple concept.  It should have been simple in its implementation.  Otherwise, it is buyer beware to those who get sick. 

Until next time…

Keep kicking the dirt!

Jeff Gersh is President of Gersh Consulting Services, a real estate advisory firm, headquartered in Orlando, FL.  He may be reached at jsgersh@gmail.com or 407-468-9328