Is the credit crisis the disease or the symptom?

I am running a friend’s campaign for city council so I’ve been talking to a lot of people the last few months. Most of the conversations have been about our home town of Bellevue WA and the local issues the city is facing but I’ve also had a number of conversations about the economy, real estate and the credit markets. The majority of the people, many of whom are developers, property/asset managers or owners, are searching for the turn in the cycle and are looking forward to the opportunities that will arise when things return to normal.

I too am looking forward to the upswing in the real estate cycle but I’m not sure that back to ‘normal’ is where we headed. I believe for the last two decades we have been and are living in the ultimate payoff of the Marshall Plan and its siblings. We have successfully avoided a third world war by creating market based economies where enemies might have arisen. This is an entirely positive outcome and surprising to me, a child of the cold war era.

Economically this means that we are living on a planet full of competitive market economies where prices are set by the lowest cost producer and the only margin available to pay our workers more is the cost of shipping the product from the low cost producer to our markets. Any industrial age product and even most modern technology based products can be produced competently in hungry economies around the world and the premium US workers enjoyed in the past is now gone. While productivity gains can help hold wage rates up they ultimately reduce the number of workers required to produce a product and in the aggregate tend to be neutral to negative on the amount of total wages.

Since these workers are also tenants, consumers and clients we are directly effected by their fortunes. Going forward their wages will continue to fall or at best be flat while the world catches up. In this environment I believe the demand for different housing types will change and will be to the advantage of long term multifamily owners. With dimming economic prospects and conservative banking back in favor, fewer people will want or qualify to buy a house, especially since single family homes won’t be viewed as wealth creation machines.

That means renting will be much more in favor. With multifamily construction starts falling precipitously a real shortage of units will arise in the next 4 to 6 years, presenting investors a great opportunity to acquire properties at distressed prices today and liquidate at the top of the cycle when new stock begins to come on line. Long term rent growth will be moderated by wage growth but multifamily properties should enjoy a premium because of their better inflation protection compared to other income property types.

The credit crisis will in time be seen as a final chapter in the Marshall Plan success story and will be revealed as a symptom of the end of US preeminence as an economic power rather than the disease.

Giovanni Isaksen
Ashworth Partners Ltd.

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