Sunday, August 3, 2008

The economy

I haven't written anything about the economy to date but I think it's time. I am motivated by the knowledge that our esteemed leader told our board of directors last week that his business is well positioned to benefit from the current economic difficulties. Now being the CCBW (Chief Cook and Bottle Washer) of Sales & Marketing I should take this as high praise. Or since you folks don't know what we sell you might assume one of two things. We sell crack cocaine or our CEO is on crack cocaine.

I will tell you that we are weathering the storm better than most and I do have my bosses wild optimism and willingness to throw money at nearly any idea as helpful ingredients in this out come. These factors, some intelligent choices, dedicated managers, a decent product and committed sales people and we do have a good chance of coming through this in reasonably good shape if it doesn't go on too long. Yep there's the rub. How long will it last???

I think we are in this for the long haul in terms of today's email driven nano time culture. The window for me is less than 10 years but more than 5 years. The next question what is the measure? It's housing. It's not getting the balance sheets of every financial entity in the world healthy. It's not bailing out the worst case home owners, that's a drop in the bucket. There is not enough money in the world to reinstate the lost equity and net worth for the millions of people who have been severely hurt world wide. We love our quick fixes but there isn't one here. They can bail out the investment bankers that caused this and the Banks, GM and Ford, toss in private equity owned Chrysler, that would be interesting, but there is no bailout for us. This will not end until millions of John Q. Public home owners are made whole. Which means values must begin to approach pre-crash levels. If that's possible in view of other pressures.

Two and a half years ago I felt lucky sell a home and leave one of the most depressed area in the US. I also felt lucky to purchase a home in one of the most sizzling hot real estate markets in the country. I had a choice to lease or buy. The market was softening a bit and I saw this as an opportunity to buy (best not to take investment advice from Lester). The home was part of my retirement plan. It was a lucky break for me to find a great job in a good real estate market, save my money for my fast approaching elder years and hopefully pocket some profits from my home.

The house part is a full blown disaster. To date I've lost my 20% down payment and if I could attract an offer for my home here my sense is I would need to bring another 10% to 20% of the original value to closing to satisfy my mortgage holder. That's a 30% to 40% loss on a beautiful home in a highly desirable resort community in 2.5 years. If I am able to sell this home within the next 5 years for what I paid for it I will consider myself a very lucky man.

People have lost money on their homes in the past. The great depression comes to mind but the level of home ownership by the masses was less then. There are also the examples of urban blight driven by the abandonment of the cities in favor of the suburbs. We also have localized housing declines driven by natural disasters like Katrina or isolated environmental disasters like Love Canal years ago. We've never seen anything like what we have across the US now.

My sense is many people are thinking the housing problem is limited to just the housing market. I think the growth and vitality of the economy is closely tied to our mobility. Our economy is driven by people wanting bigger, better and more. The inability to trade up severely limits the fuel that feeds our economic engine. People can't sell a house to buy a bigger one in the same city or sell a house to take a better job and buy a bigger house in a new city. This hurts our economy. The business in the new city is deprived of needed talent and skill the local builder loses the opportunity to build a new housing unit creating down stream job losses literally around the world. The movement of people fuels every segment of the US and world economy in some way. It's less than it was now, a lot less.

Part of the answer to this is for the speculators to return to the housing sector. But they are waiting for the bottom which will be indicated by a reduction in the foreclosure rates. Unfortunately, high energy costs are putting greater pressure on mobility and consuming discretionary income further suppressing economic activity. Less economic activity leads to higher unemployment and lower personal incomes feeding less economic activity which will feed more foreclosures. This is not a good cycle and I don't believe there is anything that any one can "DO" about it. It must run its course and this is going to take a long time.

Enough for today, more later.

Thanks for reading.

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