Four Forces - The First Two

There are Four Forces that need to be considered in forecasting the real estate market.  Here are the first two.  For a more complete discussion and our forecast of the real estate market in 2010 and 2011, please download the presentation we made to the Board of a large community bank entitled "RE/set RE/position and RE/start".

     1.   Never bet against the Fed. - It is real easy to "win" when you make the rules, and that is precisely the role of

           the Federal Resrve.

   The Federal Reserve serves two critical roles in our economy - (1) it controls the money supply and (2) it is the

   buyer of last resort.  The only element of control that the President or Congress has over the Fed is the appoint-

   ment of the Chairman of the Federal Reserve.  The rest of its decisions are made by the Federal Reserve Board

   internally.

   While some think this is horrible, I happen to think that it is a great idea.  Given the decisions that have been

   made this calendar year by this Congress, I can imagine the chaos if Congress had control over our money

   supply.

     2.   Growth Management continues to increase housing costs:

   In metro-Richmond, between 1998 and 2009, the time required to complete the entitlement process for a new

   residential subdivision increased from one year to approximately three and a half years.  Some of the items

   creating that delay and driving up housing costs are the following:

A.  Non-tidal wetlands - Governed by the Corp of Engineers, this approval process is unnecessarily complex,

     time-consuming, and the bureaucrats have absolutely no incentive to make a decision.

B.  Virginia DEQ's Stream Impacts - Apparently, VDEQ believes we Virginians are too stupid to understand

     streams but we are fortunate to have the Virginia Department of Environmental Quality (DEQ) to define it

     for us.  In typical bureaucratic fashion, they have now come up with definitions for three different types

     of streams - perennial, intermittent, and ephemeral.

     Their most recent form of stream, an ephemeral stream (ephemeral means ghost-like in Webster's

     dictionary), literally defines as a stream wherever water collects during a storm in order to run off, even if

     it completely disappears once the storm event passes.  In each case, impacting any type of "stream"

     carries a very high cost in approval time and impact fees of currently between $500 and $600 per

     lineal foot of "stream".

C.  Cash proffers - Because it is politically expedient, politicians have decided that only new houses impact

     communities in terms of traffic, services, and the environment.  Therefore, many counties in Virginia

     charge a cash proffer.

     Not understood is the fact that the cash proffer becomes part of the cost of the residential lot.  There

     is a ratio that the appraisers want maintained between the lot and the total package of the lot and

     house typically with the lot being around 20% of the total.

     Therefore, the impact of the cash proffers is magnified five times.  This increases the size of the house

     the builder must build and therefore increases the sales price of the minimum sized house that can be

     created in a community.