Trouble on the Real Estate Horizon?

Nothing like a tax bill to wake you up. Weber County in Utah seems to have decided to do away with separately taxable land and building evaluations and the correspondingly variable taxation rates, resulting in a tripling of the tax for speculators and non-speculators alike. This is presumably so the County can share in the profits realized as property values have almost doubled in the last few years.

I can think of a situation where rental property owners might find that this puts a crimp on their income, or where an elderly couple finds they can't afford to pay the tax, to the point where neither homeowner can retain his property. This results in their putting it on the already overloaded market. We all know what this does to property values.

On another front, a friend is unable to sell his home in California, and he will soon find himself between the variable-rate rock and the overpriced-home hard place. Hopefully, he will not have to submit to foreclosure.

Wall Street pundits think stagflation seems to be around the bend, judging by the recently released statistics on the GDP and inflation. Anxiety is rising for the next Fed rate announcement. Will they accommodate or tighten? At this point, Las Vegas-type betters are saying the odds are favoring a rise by a small margin. Borrowers must be on pins and needles.


[Thanks to opieblue.typepad.com for the image.]

Anecdotal, all of this; but aren't these interesting times we live in. I blame excessive credit creation for these inequities. I believe that property values have ballooned because the Fed has "printed" too much money. The rest all flows from this original sin. Inflation tends to first benefit the real estate contractors, then other speculators; then, as it works its way through the system, its effects begin to inflict pain on unsuspecting homeowners, e.g. lower income elderly living on a fixed or almost fixed income, who find their property tax has tripled and prices are going up, through no fault of their own.

But the Fed people are much too far away from a tiny town in Utah to care.

The True Cause of Global Warming?

Realists and scientists (at least true scientists) will be interested to read this real news (as contrasted to fake and hysterical speculation) about the true cause of global warming, printed in CO2 Science Magazine:


[Thanks to havanajournal.com for the photo.]

"Based on information that indicated a solar activity-induced increase in radiative forcing of 1.3 Wm-2 over the 20th century (by way of cosmic ray flux reduction), plus the work of others that indicated a globally-averaged solar luminosity increase of approximately 0.4 Wm-2 over the same period, Shaviv calculated an overall and ultimately solar activity-induced warming of 0.47°C (1.7 Wm-2 x 0.28°C per Wm-2) over the 20th century. Added to the 0.14°C of anthropogenic-induced warming, the calculated total warming of the 20th century thus came to 0.61°C, which was noted by Shaviv to be very close to the 0.57°C temperature increase that was said by the IPCC to have been observed over the past century. Consequently, both Shaviv's and Idso's analyses, which mesh well with real-world data of both the recent and distant past, suggest that only 15-20% (0.10°C/0.57°C) of the observed warming of the 20th-century can be attributed to the concomitant rise in the air's CO2 content."

--CO2 Science Magazine, 19 July 2006

There are few things worse for the well being of mankind and our economy than bad science. Climatologists, like economists, must work on their objectivity and their methodology, so that they do not become part of the problem.

Rent-Seeking

Rent-seeking. This is a major factor in business today. I know this from personal experience and speak of it from the point of view of the business space lessee. I was one (was, because we sold our successful venture); and the misappropriation of a part of our rent for undeserved landlord profit was enough to discourage me in the future from opening another business in a space that I do not own myself.

As you read through the classics of economics (Adam Smith, John Stuart Mill, Alfred Marshall), you begin to understand the idea of "rent" and its complexities. In economics, the word "rent" has a special meaning.

Rent, as most people understand it, is what you pay for your apartment or your commercial space; but in economics, "rent" is sometimes divided into several sums. The first is the compensation to the landlord for his preparation and maintenance of the land, and perhaps for the construction of the building he placed upon it. This part (let's call it Rent 1), is a normal income and profit that anyone would need to receive, in order to be motivated to prepare land and buildings for someone else's use. It is market-inspired and market-justified. No one and nothing should interfere with Rent 1.

Sometimes an apartment, a piece of agricultural land, or a commercial space becomes more expensive than it ordinarily would in minimal market-equilibrium circumstances. It brings in more "rent" than would be sufficient to cover Rent 1. This portion of extra rent (let's call it Rent 2) could be due to some special labor on the part of the landlord. Perhaps he has created an especially nice apartment, or he has leveled a field and taken out all the rocks. This is also justified profit and should return to the landlord.

Sometimes, however, the price of an apartment or a commercial space goes up a third ratchet, not because of the landlord's building or his work, but because of his tenant's extra work, or simply because of the land's situation. This we could call Rent 3.


[Thanks to Wikepedia for the photo.]

A fellow named Henry George wrote a bestseller back in the late 19th century, called "Progress and Poverty." He understood the inequities of the Rents 1 & 2 vs. Rent 3 dichotomy. He proposed a fascinating solution. (See below.)

In today's blog, however, I just wish to point out that from personal experience I can tell you that all rents should be returned to those who create them. In most cases, the landlord does not furnish all the work behind Rent 2 (even though he may sometimes have a role to play), but it is often the business person who spends the effort in fitting out the space and in carrying on his business in a professional way who is the real originator of Rent 2. Often, it is not the landlord who improves the land, but rather the farmer who toils it alone. Those portions of Rent 2 should return to their creators.

Sometimes, it is even the municipality in which a building is located that deserves a lot of the credit. Henry George supporters use the example of a skyscraper in the middle of the desert that would be worth nothing and would bring in no rent. The very same skyscraper in the middle of New York brings in millions. Should the landlord be the only one to profit from this true "windfall?" (And this is one of the few times when the phrase is appropriate.) After all, you cannot make more of Park Avenue. The supply is limited ("inelastic," in economic terms.)

Read Henry George's work and the solution he proposes. Some places have implemented it, and it works. The book is a great read. The man had a way with words, and he makes as much sense today as he did over 100 years ago. (Anecdote: Agnes de Mille was his niece, I believe.)

Reading the Crystal Ball

Market players have a tough time of it. Not only must they attempt to predict consumer taste and spending power, but they must also try to read the numbers and interpret the Fed's every word for the direction of interest rates.

The Fed's purported role is to control inflation, while at the same time insuring that the economy has wiggle room enough to avoid recession. But the Fed, as it portrays itself, is the equivalent of the tail wagging the dog.


[Thanks to loreenleedy.com for the image.]

The Fed can only act upon its own interpretation of statistics. The statistics in question are all after the fact -- the definition of statistics being "numerical data." You can't have data unless you've had the acts that create them and the time to collect, record and publish them.

The Fed's purported role as stated is nonsensical. You cannot "control" anything (implying foreknowledge of the economy's reaction to manipulated events) (1) using tools that are several weeks if not months old, and (2) manipulating events that are only a few of the many that affect an economy.

Read about Bernanke's quandary next Wednesday. The CPI statistics come out that morning, and he is speaking to Congress that afternoon. Marketwatch story.