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  The Making It! Business Blog
by Nelson Davis

Friday, March 19, 2008
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HARD LANDING IN THE REAL ESTATE MARKET

At the age of 16 I had my first flying lesson and as an adult enjoyed flying a variety of aircraft and eventually was part owner of a training and repair facility in Van Nuys, California. Hard landings are a part of flying and memorable for both pilots and passengers. Not long ago some vaunted economists at UCLA predicted a soft landing for the housing market---but as you’ve seen, the reality turned out to be a real ouch inducing thumper!

   

This is really a tale of scientific statistical analysis by brainy, highly educated people versus common sense reasoning. Being a small town boy from the south, I think that common sense is more difficult to find than the former. My thinking on the subject began when a friend who was a major residential real estate investor had begun selling off many buildings in California about two years ago. His simple description was “this market can’t sustain itself,” and he behaved accordingly. By 2007 my guess was that slide would continue until sometime after the 2008 presidential elections and inauguration. Now with so many unexpected grenades exploding in the credit markets, we may be bailing water out of the real estate boat for several years beyond that. As a businessman my advice is to accumulate dollars and be patient because the opportunity to acquire assets at a discount will appear.

But let’s get back to the brainy, highly educated analysis. The real estate investor and I both read a Los Angeles Times article based on economic forecasts by a team of UCLA economists printed on Thursday December 7th-2006. Under the “Soft Landing” headline, the sub headline in Lisa Girion’s article was “Anderson economists say the struggling housing market by itself can't cause a recession in California or the U.S.” In their quarterly forecast, the UCLA Anderson economists said that Despite the housing downturn, the California and U.S. economies are headed for a soft landing because trouble in one sector alone is not enough to trigger a recession. California could have a soft landing-- slowing growth but without recession -- as long as it’s economic woes are limited to the housing sector,” according to economist Ryan Ratcliff. The forecast went on to say that "The question for how bad this thing is going to get over the next two years is whether or not something else comes along and becomes the double whammy." Well the sub-prime craziness dragged down Country Wide and blew a fatal hole in hull for Bear-Stearns. Indeed, there was a double whammy with a third one on the horizon for the Golden State.

In his California forecast, Ratcliff expressed concern about two aspects of the economy: consumer spending and the state budget. If problems develop in either area in conjunction with the housing slump, then the state could slide into recession, he said. But Ratcliffe concluded that neither of those scenarios was likely. How about that $16 billion and growing shortfall in the 2008 California state budget? Another projection, from the University of the Pacific's Business Forecasting Center, was more definitive. "Economic growth will slow significantly, but a recession is not in the cards," said Chuck Williams, dean of the University's Eberhardt School of Business.

Seeing around corners is something most of us (except politicians--it would scare them into action for a change) wish we could do and we probably can for short periods of time. Of course we now know more of the bad news and are beginning to feel the pain of high level financial and strategic miscalculations. With the “R” word (recession) tumbling off the lips of more people every day, media pundits are doing their part by firing rounds of negativity into our usually upbeat and positive attitudes.

 

To come up with your own forecast, question what you are told and apply a big dose of common sense. If the average person can’t afford a house, then it is a market that can’t really grow. If your broker is offering some exotic financial instrument that you can’t understand even after they explain it, take the Warren Buffet approach and don’t touch it. If you think that a sound economy with long term prosperity can be built solely on knowledge and computer key strokes think again. If someone tells you that cheap money and low inflation go together, study a bit of financial history. This landing is already hard for many people and may become so hard that we blow out the tires and skid to the end of the runway.

 

  

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