Real Estate Markets

Ubiquitous fundamental laws apply to markets of all types

Limited supply of non-fungible product embedded at a location. Buyer impacted by interest rates, personal taste and needs, financial capacity.

TO: All Real Estate Mavens who promote near-term speculation & investing in real estate:

About real estate, corporate operations and financial management you are correct in believing that businesses will always need real estate and property managements and therefore, there are fortunes are to be made in owning real estate and managing properties. However, there is a subtopic which is philosophically and operationally interesting, but to avoid needless distraction here, we identify it in the note below and hold it for another discussion.

Many financially successful people throughout history have been land owners. That is true and that is one of the reasons you are likely to be very wealthy someday. Very wealthy someday provided that you have luck and are wise in most of your investments.

When we advise you to "be cognizant and remain aware that commercial real estate is in the early stage of a major contraction phase," we are attempting to increase the possibility that you will be as wealthy as you want to be. To be blunt, any wise-minded, alert, risk taking real estate person can likely amass a few hundred million dollars worth of real estate in not too long a time depending upon prevailing market conditions. But in order to 1.) Minimize the quantity of bad and ill timed investments and, 2.) To effectively remove the upper boundary of your potential wealth, you should always be cognizant of the grand macro view of real estate.

The Point:

Today the grand macro view of real estate is impacted by the unprecedented free flow of all types of information which is available to nearly every individual, every business, every employee via intranets and the Internet. Information is available to those entities WHERE EVER they are or want to be. This means the value spread between types and grades of commercial real estate is flattening because businesses can function as geographically distributed and dispersed physical organizations. Their amorphous form is being hastened by the war on our homeland. Take note of commercial real estate values and business location planning today in Manhattan and the shift since 9/11. Moreover, the utility value of residential real estate is increasing since people can work from their homes.

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Since many smart, somewhat smart, and not smart people realize -- along with each of you -- all the obvious facts regarding real estate's potential, every up phase tends to be exaggerated. And so will every down phase, since the weakest minds and hands get shaken out in down phases. You must be aware to not move into investments in the later stage of an up phase. No one can call the top and you may be the greatest fool who gets left holding the bag.

Remember, that those who really make BIG money have CASH and credit near the depths of down phases which they use to buy QUALITY assets at genuinely DEFLATED prices. Recall Joe Kennedy, Sam Zell and many others, not including Trump.

All this to get to the useful points: Be wise and reasonably cautious. Do not over extend yourself into an up market or at the early stage of down market. Consider selling into an up market rather than buying into it, except to replace sold assets.

Sincerely,
Editors, UnderstandingMarkets.com

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NOTE: For those who insist that as long as interest rates remain low, real estate will do well:

The interest rate at a given moment is relative to current interest rates factored against direct risk-reward elements and indirect risk-reward alternatives as perceived by the market participants' psychology and their beliefs about future valuations.

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NOTE: Regarding the premise that, "Land is a limited commodity that cannot be reproduced."

Fact: The premise is valid in the strict sense that obviously a specific piece of land is totally unique. However, a person can effectively make new land by going out past a variable point and buying the next "corn field." For example, when that Northerner bought his house in Florida in 1972, it was on new land. Or, old land that was newly developed. In the United States there is plenty of civilizable, arable land (Palm Springs -- it was desert, the states of California and Louisiana -- they were unexplored frontiers, and on ad infinitum.) This leads to an important discussion and is very relevant for day-to-day real estate decisions. For purposes of this memo, this point is distractive and therefore, destructive to your understanding of the main concept above.

See also: What makes a market?

The investment axiom that is always valid: Caveat Emptor

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