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Okay, geniuses. I'm looking ahead past the mortgage meltdown/real estate glut.
Obviously, there are parts of the country that are Ground Zero for this problem, such as California, Las Vegas, South Florida, et. al. Look at a place such as Fort Myers where 1 house in 65 is in foreclosure, and it's really staggering.
On the other hand, there are other economically strong markets where more conservative lending guidelines prevailed and home values didn't appreciate like something from the South Sea Bubble or the Dutch Tulip Craze. In those markets, the foreclosure rate is one home in 1,500 or 2,000. And home values did not drop markedly and may have even inched up, despite a rotten real estate market elsewhere.
So my question is this. What longer-term general economic benefits will these markets derive from relative stability in their housing and lending markets, as opposed to markets that suffered through the real estate crash? I'm curious to hear your opinions. Mind you, I'm not addressing the real estate market per se, but the overall health of these cities' economies.
Okay, geniuses. I'm looking ahead past the mortgage meltdown/real estate glut.
Obviously, there are parts of the country that are Ground Zero for this problem, such as California, Las Vegas, South Florida, et. al. Look at a place such as Fort Myers where 1 house in 65 is in foreclosure, and it's really staggering.
On the other hand, there are other economically strong markets where more conservative lending guidelines prevailed and home values didn't appreciate like something from the South Sea Bubble or the Dutch Tulip Craze. In those markets, the foreclosure rate is one home in 1,500 or 2,000. And home values did not drop markedly and may have even inched up, despite a rotten real estate market elsewhere.
So my question is this. What longer-term general economic benefits will these markets derive from relative stability in their housing and lending markets, as opposed to markets that suffered through the real estate crash? I'm curious to hear your opinions. Mind you, I'm not addressing the real estate market per se, but the overall health of these cities' economies.
I'm not an economist, nor am I an expert.... but I guess I'll take a stab at it.
I think you answered your own question. The long-term economic benefits are that those markets will be more stable. Overall, the economies of an area would follow the natural rate of growth/contraction (based on the factors of production - land, population, capital).
In a stable environment these factors would also have stable growth/contraction. In a volatile environment, there is higher risk, but there is also more opportunities during the thoroughs to grow... so overall the long term trend would still be based on the natural growth/contraction rates (based on factors of production) except with higher volatility.
So, basically, it's like most other things in investing, with higher risk, you get a potentially higher reward/loss... with lower risk, you'll have more stable returns. Long term wise, they both go along the natural rate of growth/contraction for the area.
That's my take on long-term economic activity for both volatile and stable housing/economic environments.
I'm not an economist, nor am I an expert.... but I guess I'll take a stab at it.
I think you answered your own question. The long-term economic benefits are that those markets will be more stable. Overall, the economies of an area would follow the natural rate of growth/contraction (based on the factors of production - land, population, capital).
In a stable environment these factors would also have stable growth/contraction. In a volatile environment, there is higher risk, but there is also more opportunities during the thoroughs to grow... so overall the long term trend would still be based on the natural growth/contraction rates (based on factors of production) except with higher volatility.
So, basically, it's like most other things in investing, with higher risk, you get a potentially higher reward/loss... with lower risk, you'll have more stable returns. Long term wise, they both go along the natural rate of growth/contraction for the area.
That's my take on long-term economic activity for both volatile and stable housing/economic environments.
-chuck22b
Excellent reply by chuck22b.
Let me, perhaps, summarize it: economic agents in the stable markets have a more accurate measure of what their productivity is really worth.
But, more to the point, wouldn't more stable markets retain more of their wealth in a meltdown like this? And wouldn't their banks be in a stronger position to fund future growth?
But, more to the point, wouldn't more stable markets retain more of their wealth in a meltdown like this? And wouldn't their banks be in a stronger position to fund future growth?
I'm kind of curious about this effect.
I see what your getting at. Basically it's like someone who was frugal and lived within his/her means all this time vs. someone who got himself in debt and lived the high life. At this point the frugal guy actually has more options and potentially can expand/grow (basically one community has a higher savings rate in the model).
If all things equal, and doesn't change, if the local government doesn't attract businesses, people don't really move in/out of the area, etc. The stable economy has already reached it's stable economic growth potential (natural growth rate), then it really has no real incentive for people to come move in, businesses to invest in additional capital, etc. since there isn't really a potential for above natural growth. Basically it's a mature economy.
If, on the other hand, the government changes policies, to induce growth... then the previously stable area has the potential to grow faster by attracting businesses, strengthening the labor pool (education/skills training), etc. but then, it also assumes more risk and takes on more characteristics of the volatile economies. Likewise, it can contract fast as well.
Long term wise, the growth rate will still depend on population, land, and capital and the factors for production and end up to still be at the natural rate. The primary way to improve natural growth rates is through education/innovation (increasing productivity). Yes, the stable areas have the "option" to incur more risks to increase short-term growth rates, but then it would also loose some of the characteristics of being stable.
So far, the "Ground Zero" cities are the ones we're hearing about. What nobody is talking about yet is the fact that this credit crisis is systemic, not local. There are strong housing markets where homes are not selling quickly or for previous values, just because the banks haven't the money to lend. As soon as prices are lowered to facilitate a sale, ALL houses in that area have their prices correspondingly affected. It's like a ripple from a pebble thrown into a pond - it will keep widening and widening. It will touch everyone before it is finished. It won't be finished for a good long time yet.
What to say..Personally, mine general rule for investing- "never buy high".. So if it was not hot for years- who knows, it can jump in future..
But with local economies you have to have some local reason for growth- such as land resources, attractive tourist potential etc.
Detroit, e.g., how much time it would take to issue not-oil driven competive car line? It can take years..
Look at oil-rich provinces of Canada- they were deserts about only ten years ago and now new cities grow together with RE prices.
The demographic center of the United States is moving to the southwest. The northeast and midwest are slowly losing population, while the southwest is rapidly gaining. It's not just immigration (legal or otherwise) from Mexico that's causing this shift. Many native born Americans are getting older, and as their bones and joints get weaker, it becomes more difficult for them to tolerate wintry weather....and the southwest becomes more attractive. So if I were to make a bet on where to invest my money over the next 10 to 20 years, it will be in the south to southwestern parts of the United States. These regions can be considered "emerging markets" (high growth, high volatility, and high return regions), while the industrial northeast and midwest are analogous to "stable mature economies".
I agree that there is currently a shifting southwest, but I wonder if concerns about water supplies will impact economies there in the future.
Places with stable economies, infrastructure and that are relatively free from natural disasters will probably look like good options for retirees and empty-nesters, which would provide ongoing economic benefits to those places - jobs in medical care, people to set up early-bird dinner buffets, stuff like that.
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