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Jim Scott
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Greeks Bearing Gifts


    The financial crisis that originated in Greece continues to wreak havoc on Wall Street, threatening to undermine America's fragile economic recovery.  But there are always winners in the worst of times. Foreign capital is flocking to safe havens in the United States, mainly government debt. Demand for 10 and 30-year Treasuries is such that mortgage rates will not be increasing for one or two years. This gift from abroad should continue in spite of the stomach-turning ride in American equity markets. There are too few islands of perceived safety in this storm and way too much cash sloshing around.  


     I never quite understood how European governments and businesses could offer such munificent bounty to its citizenry.  Some posit that workers on the Continent enjoy six weeks of annual vacation and retirement at 50 because Americans picked up the tab for the Cold War. This explanation is partially correct; the reality is that the post-war Worker's Utopia was financed by sovereign debt, exports and manufacturing.  Governments ameliorated the effects of globalization by borrowing money.  The Greek debt situation was a harbinger for the richer EU members. Austerity measures are changing the Western European social compact. They understandably do not welcome this new vision of their future; after all it is us. How can a proper Frenchman exist on two weeks vacation a year? 


     Post-bubble America is making or has made many adjustments to compete in global markets. President Carter got the ball rolling in 1978 when banks and airlines, among other industries, got deregulated. All of this was followed in the next decade by national fiscal policies that transformed the post-Depression social compact.  Lastly, corporate America understood they could not compete abroad without sharply curtailing wages and benefits and ushered in the two-tiered wage system. 


     Being able to thrive economically against China, Brazil and India is vital. Today's housing values and rents cannot be sustained over the next decade unless we can compete in the new economic order. There is no more reserve in our tank. We borrowed and spent paper equities on the way to squandering the economic legacy of the WW II generation. We took monies from education and spent them on $250,000 Porsches. Californians decided to limit property taxes so that our infrastructure and education system could be second-rate. The only way to protect property values is to protect jobs, and that requires sustained investments in building our competitiveness; otherwise we are on the road to falling real estate prices.  


     Europe's problems and last month's inflation numbers suggest a long period of cheap money, contrary to the beliefs held by deficit-hawks. Those in the real estate sales trenches know the value of these rates and loans under $700,000 are inexpensive and relatively easy to get.  Jumbo loans are problematic but it is not an impossible situation. The relative paucity of sales in the upper reaches of the market is influenced more by savaged portfolios, troubled commercial investments, and job insecurity than by tight-fisted underwriters. Accordingly, even cheap money is often not enough of an incentive for these buyers to take on additional risk. They usually have a personal residence and often regard move-ups as discretionary purchases. Any potential upgrade in quality, size or neighborhood has to be priced attractively.  


     The combination of job growth, rent increases, slow-growth politics and low mortgage rates will keep prices stable in the urban core.  Even with very modest appreciation, investing in a quality product with inexpensive money is a good strategy for the next four or five years. The economics of home investing in the exurbs and suburbs is less promising.  If you doubt this, compare the value loss over the past few years for houses in Mission Hills with a classic exurb like Murietta. This differential will not go away in the future, but will in fact become more pronounced. High quality real estate in supply-constrained urban markets will be as asset class investors will run to, not away from, over the next few years. 



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