Time For Buffett To Retire…

Warren Housing, really? Ever hear of this thing called supply and demand?

A recent USA Today article confirmed to me that we shouldn’t allow folks like Warren Buffett to make comments in the media any longer as the “Sage from Omaha” latest prognostication has left me scratching my head.  As the octogenarian mogul stated that he believes our economic salvation will come in the form of renewed housing starts.  Ok, this goes to show you “kids” you don’t have to be smart to have a lot money, just convince people that you are and they will follow, as Warren we need to talk.

First (Warren), let’s look at demographics as more people are dying then being born, so with existing supply far out striping demand why would we want to build more new homes?  So strike one Mr. Mogul, next up is the fact of the resources themselves as at the time of the last housing boom China was not the hungry monster it is now.  With that said, many of the raw components which fueled the original building “boom” where cheap and those days are gone as their value off shore is far higher than on if they are sourced here [in the first place] and if not their value to China and the east is greater than here in the states.  Thus strike two for Mr. Sage as no longer is there a need and two the cost is going to be significantly higher too.  So again, this is why the market is packed full of existing properties for pennies on the dollar.

Speaking of dollars, where are they going to come from as no one (rhetorically) has a job, ok well at least 9.2 percent don’t and that doesn’t count the people who have fallen off the rolls and given up so will bet more on a number of 11 to 12.  Also the government isn’t going to be able help as they have already done their damage with Quantitative Easing One and Two.  Thus strike three Mr Buffett to your Omaha based wisdom your wrong about this one so maybe a game of bridge with Gates might be more your speed these days.

So ok, what is the answer you ask, that’s a good question and for one thing its easier to answer in terms of what its not and those are autos and homes.  Yes we need both however we have enough of each therefore life for them will be more about equilibrium then growth.  Alright know that still is a little of a cop out as it’s easier (as fairly noted) to call the losers rather than the winners. As if push came to shove the answers for me are Biotech and Semiconductors as odd as it may sound, both are interrelated.

However the real answer will not come till we see a greater inflow of hard cash back into the country as guess what our biggest problem today is?  If you guessed “we are out of cash”, you’re officially smarter than a fifth grader…

 Note to Readers: yes, fully realize there will always be new housing starts as inventory turns over in age and location.  However the days of the boom demand are gone, therefore this should be viewed more as a measure of equilibrium rather than growth.

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About Joseph Campbell

As a strong believer in the fact that "people work for people", it has been a life driver to better to understand the complexities of the various aspects which drive efficiency within this axiom, especially the concepts of leadership. Supporting this, I have been fortunate enough to having experienced this as leader on a global basis over the last decade and half. During this time it has been clear there are three core drivers being Life, Leadership and Economics.
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6 Responses to Time For Buffett To Retire…

  1. Jason Fisher says:

    Joe,

    It is my opinion that the useful life of the existing housing stock is depreciating quicker then in years past. I believe this for several reasons, but the one I would like to focus on today is the vast number of homeowners who seemingly fail to maintain their home either because they don’t have the necessary skills, motivation, money or all three.

    As a result, a 15 – 20 year old builder grade home could be in grave disrepair if the homeowners fail their obligation to maintain their home, let alone clean it. In years past we would have opined that a 15 – 20 year old home was relatively new, but these days the 15 – 20 year old home could be equally the money pit of a 30 – 40 year old home.

    With that in mind and as a landlord with too much ongoing risk to mitigate and someone in the market for a larger home, I have a couple standards I have set which are driving me to new construction, probably a custom home builder, even though as you point out there is a plethora of existing housing stock.

    At this point in the game we will only consider existing housing stock presuming it is located in a desirable area and if we can obtain the property for .40 to .50 cents on the dollar, and presuming it was not overpriced to begin with.

    The reason being is we’ve been through enough homes and have a keen eye for the details and most of the homes appear to require significant work either because they have not been maintained by the homeowner or due to the quality of the builder grade materials employed in the construction. Therefore, without a significant discount for us to hold funds in reserve for repairs or gut we will not entertain the existing housing stock. Furthermore, if we build new we have little money out of pocket, any upgrades are rolled into our loan and eventually help us with our mortgage interest deduction.

    If others in mass come to similar conclusions as my wife and I, I could very much see there still being demand for new construction and it is possible the old housing stock becomes obsoleted much faster then in days past…

    Kind Regards,

    Jason Fisher

    • Joseph Campbell says:

      Jason, interesting points however keep in mind housing is like an ice berg there is more of what you don’t see then you do. Case in point the effort to develop a subdivision, laying the utilities, road, hiring the fireman and police officers to protect it are all basically one shot deals. So while while your correct the “skin” of the house is really small patatos compared to the whole. The other issue is money, as there isn’t any because its all sitting in China as simply look at the debit/trade ratios as there are only so many dollars. Thus the only dollars that are coming back is through federal bonds meaning they are loans. So if you play out the cycle its self destructive, as the 1 bond dollar that comes back goes back for more goods means another dollar you owe and so on. Thus no money to loan… Cheers!

      • Jason Fisher says:

        As you point out the trade imbalance with China and the offshoring of production has essentially left the US producing no tangible goods and it appears in time most of the knowledge based services will also be shifted to the next lowest cost labor delivery center for short term gain.

        You mention Biotech and Semiconductor as possibly a bright spot in the future, but in terms of pure numbers and jobs do you think these industries could even make up a fraction of what Manufacturing represented to the US?

        I would be interested to hear your thoughts on the outlook of the US and possible solutions to the mess we’ve created.

        Jason

      • Joseph Campbell says:

        The US is in a mess, as I’ve spent over a decade working in global enterprises and it saddens me to see where this country is as I look from the outside in and while I speak of china holding our wallet. We have to remember they didn’t take it at gun point as we freely handed it to them also dont get me wrong either as products should be produced where they are most efficient which for the most part means off shore. So where did we go wrong you ask? One is hyper consumerism, we purchase for the sake of purchasing and not for need any longer, next our tax system is horribly outdated and not matched to a global economy as companies are penalized tax wise for repatriating cash. This is driven by the concept that the rich should be punished, which I wont get going on as that tick’s me off as I want rich people to be happy as they employee me as well as most people at the other end of the internet. One of the other things we need to do is renstate the Glass–Steagall Act and repeal SOX (it scares companies away, wastes money and did it stop the melt down, no so I rest my case). Why did I pick Biotech and Semiconductor , simple both are innovation and intellectually driven which are good fits, and they also require a very high degree of precision which most other countries can not achieve as of yet. Yet the biggest is both are subject to Moore’s Law which return far more then their investments in very short time periods.

  2. Jason Fisher says:

    In regards to Production offshore and freely redistributing our wealth to China as you pointed out I think it is high time we look at some of the issues at hand facing the US with a sense of Nationalism and not from theories taught to us in MBA classes by foreign professors (just let them visit Flint, MI or Youngstown, OH and ask them how that really worked out).

    I say if we want to prosper again we must move forward keeping surival of the fittest nation in mind and evaluating what protections and incentives we as a country need to employ to reverse the sheepish acts of our past.

    Obvisously, that would require our government to take a stand on something, which they are COMPLETELY incapable of doing. My only solution to our governments gridlock is to vote every member of Congress, the House of Representatives and the Senate out and replace them with leaders of business, industry and anyone with a lick of common sense who wants a better place for their grand children to live!

    • Joseph Campbell says:

      One the biggest things my wish for the government would be for them to stand out of the way, as in a capitalistic society the role of government is to provide for common social needs and governance. They, need to stay out of the “market” making business as in the piper must be paid and they spend more time robbing Peter only to pay Paul for sitting home on his butt watching the Jerry Springer show…

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