Buy Land. They Aren’t Making It Any More.

I am on my way home from New Orleans, where I have spent the last three days at the National Association of Realtors conference. While I was there I took a fascinating tour of the lower Ninth Ward and the surrounding bayous, so now I have a better understanding of what actually took place in the aftermath of Katrina and why the maintenance of the wetlands around the city, as well as the levees, are so crucial to the city’s survival and health in the decades ahead.

The conference was full of interesting information about real estate values nationwide and the overall impact of the economy on our industry. My favorite take-aways appear below.

Lawrence Yun, the economist for NAR, took the average of the predictions of 100 economists about the years ahead for existing home sales and arrived at the following (Mr. Yun says that even though individual economists are almost always wrong, averaging their predictions shows an uncanny prescience):
* Price increase in real estate during 2011: .78%
* Price increase in real estate during 2012: 2.3%

I love it when 100 economists overall agree with me that we are looking forward to a year with almost no price appreciation! As we all know, real estate is local so in New York, if bonuses are good, we may do a little better. But I do not think we are looking at substantial price growth until we have more consumer confidence and better job growth.

Mr. Yun also informed us that the Consumer Price Index for 2010 is a mere 1.1%. While this is a historically low number, it reflects the fact that that nationally, real estate prices continued to fall throughout much of the year, thus exerting downward pressure on the other elements of the CPI (this made me once again relieved to be a broker in New York, where 2010 saw modest but genuine gains in residential real estate values).  The Producer Price Index for crude products, including many raw materials for manufacturing and food production, is at 20%. If prices in the crude products sector continue escalating at that rate, inflation and higher interest rates are inevitable, regardless of the Fed’s desire to stimulate the economy with cheap money.

Mr. Yun predicts that mortgage rates will remain around 5% on average through 2011, and then up to 5.5% in 2012. But he cautioned that continued growth in the deficit is a real wild card and could affect both the economy and interest rates in unpredictable ways.

For today we know that mortgage rates for most products are below 5% and that since the end of the third quarter of 2000 the Dow is up 7.5% (10,650 in 2000 vs 11,407 today), the S & P is down 15% (1436 in 2000 vs 1223 today), the NASDAQ is down  30% (3672 in 2000 vs 2580 today) and real estate in Manhattan has appreciated 40% or more during the same period. Please draw your own conclusions.