What Does Sam Have to Say?

On more than one occasion I’ve mentioned Sam Zell, the real estate billionaire and organizer of the original real estate “vulture fund” (now known by the politically correct term “opportunity fund”) of the early ‘90s.  When commercial property turned sour he was ready and armed with his $409 million fund (small by today’s standards) to buy out excellent properties for pennies on the dollar from troubled sellers, including the Resolution Trust Corporation. 

            The RTC was a quasi-government corporation set up by Congress to take over troubled thrifts and dispose of properties foreclosed as a result of the S&L meltdown.  He bought brand new apartment complexes for less than $5,000 per unit when they were going for $40,000 or more shortly before the crisis.  He was prepared.

            At a December 14^th Israeli business conference Zell remarked that “the U.S. real estate market will be in recovery by spring 2009.”  Zell also pointed out that “the US population is growing, and with fewer than 600,000 building starts in 2008, a million fewer than any of the last 10 years, demand for housing will rise.”  Zell blamed the current crisis - at least in part - on “ill-considered decisions disseminated around the world and people, in effect, respond to it, perhaps, often without any particular caution or attention.”

            What that means is that the news we hear is printed without being thought through rationally and, as a result, people panic.  But doesn’t it make sense that there would eventually be a housing shortage if new construction is virtually shut off, down to only one quarter the normal number of annual new housing starts?  Sure, there is excessive inventory (ten months worth) right now, but when financing is restored people will buy in a big way and the inventory will be quickly absorbed.  In the early 2000s there was excessive inventory, too, but it didn’t take long to turn that around.

            Another thing, in the U.S. we replace about 2% of our housing stock each year.  Add to that the increased number of new household formations and suddenly we need millions of new housing units per year.  It’s coming.  There aren’t enough park benches for all those who will need housing.

            Another factor I think contributes to the panic and confusion is the lightning speed at which information is disseminated around the world by email, TV, radio and other communications.  News comes to us instantaneously, in real time, and people are able react to it immediately and en masse because they all got the news at the same time.  Markets crash and banks suffer a run on deposits when everybody does the same thing at the same time.

            If it took a bit longer for news to get around, important events would be old news before half the population knew about it.  Today, we can get the news that Lehman Brothers is going belly up and how awful that is, with “talking heads” putting their own spin on events and how it will affect the world.  And then it does because of the speed by which we tend to collectively react.

            We’re now at or near the bottom of another real estate cycle and those who have the courage to be contrarian and buy today will be the multi-millionaires of tomorrow.  It’s not rocket science, brainy or anything like that.  Buy low and sell high. 

            I’m certainly not saying that I have all the answers but I have learned at least one thing in my long march to geezer status:  Slow down, stop and think, wait and see. 

            Remember, almost nothing is as bad or as good as you think it’s going to be.