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

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

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

Let's just stay in and talk to the house

Let’s just stay in and talk to the house

As the holidays are just around the corner, every new gadget imaginable (and some not imaginable) are being advertised as the next “can’t live without it item”.  Whether it be a bigger iPhone, a smaller iPad or a watch which is really a phone/computer, it gets very confusing after a while.  OK.  So you are wondering what does this have to do with real estate.  Actually, everything.  After all, what is a home if not your refuge from the outside world, where you can allow your stress to fade away and you can enjoy all the modern conveniences of today’s world. 

 

With that in mind, let’s look back at some of what the last 100 years have given us. 

 

The car, which led to the detached garage, which also served as a workshop, which led to the attached garage, which led to the convenience of garage door openers since no one wants to actually get out of the car, eventually leading to third car garages because life is not the same unless everyone and the dog has a car, which inevitably led to the bonus room since there was no longer any workshop space in the garage with all these cars.

 

Electricity, (I know, it was in use over 100 years ago, but humor me here), which led to the light bulb to CFL bulbs to LED bulbs.  And then to appliances, from iceboxes to microwaves to convection ovens.  Let's also not forget about air conditioning (God bless air conditioning – nuff said).   And who can forget furniture size radios, leading to black and white televisions to color televisions to flat screens to Playstation and Xbox, to 3D to Netflix on curved screen ultra HD televisions.  And, now, back again to cars (see Tesla).

 

Plumbing.  No going outside for water anymore.  No going outside, either.

 

The point is, we live in a world of exceptional change, but we are relatively immune to all The home modifications that have been occurring around us throughout our lifetimes.  We take for granted all the differences from the housing our grandparents grew up with.  There was no cable, nor clickers for the television.  Heck, now you can even just waive your hand to change channels.  Meals were family events, partially because you had no microwave to quickly heat up and prepare food.  Heat was sometimes provided by coals under the beds (okay, I may be going back another generation or two here – but I remember seeing them.)

 

Looking back to all these changes, I am sure that the housing of our children’s children will be vastly different than what we live in today.

 

Anyway, these are just my observations.  Don’t take my word for it.  Give your grandparents a call on their house phone. Then again, they may no longer have one.  You will have to settle for Skyping instead.

 

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

 

Real Estate Physics

Real Estate Physics

There are certain principles that we hold to be unalienable truths.  A unit of mass at rest will stay at rest.  A unit of mass in motion will stay in motion.  These are basic rules of physics.  If A happens, we know B to be true.  Unfortunately, the laws of physics will never apply to real estate transactions.

When buying a home, an individual will feel it is their obligation to negotiate the price.  Regardless of whether it is a buyer’s or seller’s market, a buyer will always search to see what room there is for negotiation.  Other than automotive sales, it is the only industry where it is an accepted norm to haggle on the price.

The funny part, though, is this same logic does not apply when they turn around years later and try to sell.  The same person that felt the home they were buying was overpriced at purchase will then  try to top the market for the highest possible value when they try to sell it.  Additionally, they will often get indignant when someone new attempts to haggle and offer a lower price.

Why does this happen?  Why does the mass at rest not stay at rest?  Why must we feel the boulder should roll uphill when we find ourselves as the ones now forced to push it?  I find the answer to be as simple as personal attachment.  As opposed to other retail purchases such as televisions and appliances, we find ourselves exceptionally attached to our homes.  It is like a pet.  It is a reflection of ourselves.  We have poured our souls into them.  Many celebrated life events occur there.  Our kids are born and raised there.  We improve our homes to reflect our changing personal circumstances.  Get a raise, redo the kitchen.  Your child graduates high school or college, throw a party.  You become empty nesters and have the home alone for just you and your spouse?  Well, that’s a story for a different web site.  Anyway, people tend to treat their homes as if it is a business for sale instead of an asset for sale.  They feel there is a degree of personal goodwill that has value above and beyond the sticks and bricks that should be readily apparent to every buyer that comes through the door.

Unfortunately for the seller, there is no extraneous goodwill in the sale of real estate.  George Washington did not sleep in your home.  Neither did Bill Clinton.  In fact, the day someone decides to sell their home, they need to realize that it stops being their home.  Whether they like it or not, they need to look at their residence through a very dispassionate lens.  They need to stage the house to make it acceptable and attractive to the greatest number of buyers.  Paint the exterior a more neutral color.  Get rid of the kids’ height markings on the laundry room door.  Clean out the garage.  Personal memories need to be boxed up.  No one is buying someone else’s nostalgia.

This, though, is easier said than done.  The emotional detachment you displayed for your purchase is difficult to accept on your sale.  Human nature does not have the same principles as physics.  If it did, though, we may all find it easier to buy and sell homes.

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

 

 

Mother Nature Big

Mother Nature Big

OK Florida developers.  This blog is for you.  Now is the time to reap what you sow.  You have never had a better opportunity to blow away your sales targets with out of town buyers.  Savvy developers know how to follow up on a major advertising campaign.  Offer incentives, giveaways, throw a party.  The point is to get customers through the door while your product is fresh on their minds. 

 

So, what are you all waiting for?  Mother Nature just put your marketing campaigns in bright lights, brought you mainstream to the entire country.  She gave you a first class, “A” rated advertisement for the sunnier climes.  And she did not just advertise up north where it is historically cold.  She even gave you a front page spread in the mid-south and all points in between, like the Carolinas and Georgia, where snow is as common as sundresses in January.  And what are you doing about it?  NOTHING.  Sure, you may be giving lip service about how the bad weather will cause people to move.  You may even take out a regional newspaper ad or put something on the radio or TV. 

 

Big deal.  Think bigger.  Think Mother Nature Big.  You need to not only roll out the red carpet, you need to paint the major highways red.  Physically red, using big cans of paint, directing them where to go.  Show them the path the whole way down south.  Free meals at every Denny’s and Cracker Barrel along the way if you buy a home right now.  Send a plane.  In fact, send a fleet of planes.  Let people know their flights are waiting on the tarmac.  First come, first served.  Free flights.  Hand out floral shirts and plaid shorts and tell them they look good.  Black socks, sunglasses and big hats too.  Let them know that never ending sunshine awaits.  Pay no attention to those who say they are afraid of hurricanes.  Really?  It seems like their recent winters of discontent have been on par with our stormy summers.  The last time I checked, the hurricanes played no favorites along the east coast, either.  Just ask those from New Jersey who are still feeling the effects from Hurricane Sandy.  Send buses.  Reroute trains.  It can be the mother of all parties.  Pour lots of fruity drinks with little umbrellas in them.  Put orange slices on the highballs.  Let them know they can grow those same oranges in their backyards.  Have a bonfire party.  Let them bring all their winter coats to throw on the fire.  It can be the world’s largest weenie roast.  Tell them to forget the Yankees and the Cubs.  The Tampa Rays have been better anyway.  They don’t have to worry about how bad their hometown football teams are, either.  We have three mediocre pro football teams right here that they can lament over.  You want winning football?  Follow the state’s college programs.  We even have two pro hockey teams.  Give them nice warm sweaters to wear to the games to ward off the chill from the ice.  Whatever it takes.  This is your chance.  Think big.  Mother Nature Big.

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

 

 

A not so perfect world

A not so perfect world

In a perfect world, a home will always be built on time and to a 100% quality standard.  Unfortunately, we do not live in a perfect world.  Forced to sometimes choose between a stated delivery schedule and meeting a defined quality standard, what would you do?

You may have a contract that states an anticipated delivery date.  While the date is written as a soft timeframe with more disclaimers than you care to remember, a buyer will look at that date as cast in stone.  That date, while still qualified, is then most likely reinforced by the builder during his conversations with the buyer.  Additionally, the buyer will probably be making arrangements based on that closing date, scheduling moving trucks, furniture delivery and family gatherings.  On a positive note, you can probably get away with changing the delivery date up to 30 - 45 days prior to the estimated closing without causing too much heartache.  After that, you may have a real problem on your hands and you may have to consider eating the cost of accommodations and storage expenses to reduce the inconvenience to your buyer.

On the quality side, you may find yourself in a bind if the home will be completed on time, but it does not meet the fit and finish standards that your buyer is expecting at the delivery of their home.  A buyer should always expect the same level of quality in their own home that they see in the model homes.  You also want to minimize quality issues to reduce the level of warranty work that needs to be done to a home right after closing.  No one wants to have to perform quality repairs after delivery with residents living in the home.

The question, though, was what will you do if you are forced to choose?  My choice would be to maintain quality over delivery.  You may be able to make up for the inconvenience of a delayed close by taking a monetary hit to resolve the timing inconvenience.  However, you can rarely, if ever, recover from a lapse in quality.  First, if there are issues at closing, I guarantee you that the buyer will subsequently find a dozen more perceived deficiencies with the home whether they truly exist or not.  You have already planted the seed for poor quality in their heads and they will be looking for reasons to reinforce their negative perceptions.  Second, they will absolutely tell all their friends about how disappointed they are in the quality of their home and how they have lost faith in you as a builder.  If you are late in delivery, you can go over the top to work to make it up to them.  If the quality is poor, they will always feel like they are living in a substandard home.

Neither option is good.  Life, though, is not always fair and there will be times when you have to make difficult decisions.  My decision is to always err on the side of quality.

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