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