USA Today : September 26, 2007
Below is a commentary by Dick Miller:
What is happening in today’s real estate investment market? I get that question from my investors every week. The headlines in the newspapers give facts, but where are we heading? In a meeting this morning, I used the following analogy to explain the supply/demand curve that I see cresting in Southern California.
Consider a person that brings in an investor to buy an existing doughnut shop. He gets to keep everything over $1.00 per doughnut and business is booming. He keeps raising prices and people pay the increases. Each day, he runs out of doughnuts after the 100 he cooked are gone. Doughnutless unhappy customers come back the next day earlier than before and willing to pay a little more to receive one. Then, Oprah does a special on trans fats. Millions tune in and hear about the horrors of what doughnuts can do to a body.
The next day, the doughnut shop only sells 50 doughnuts. People still pay the $1.75 that they had become used to, but there are 50 unsold doughnuts at the end of the day. This happens day after day and the baker keeps making 100 per day (since that is his contract with his investor). Some customers come in and try to bargain. “Doughnuts used to cost $1.00 and you have so many to sell. Will you sell me one for $1.00.” The answer is NO, because if the shop-owner sold a doughnut for $1.00, he will make no money due to his contract with his investor.
After a time, there is a four year supply of doughnuts in the shop. Customers trickle in, but they increasingly are waiting for the price to come down. They don’t care about the shop owner or the investor partner. They will do without a doughnut until the price either comes down, or Oprah says that they are safe to eat. Then one day, the investor comes into the doughnut store. He demands a return on his money and all the owner has to offer is a truckload of unsold doughnuts. The investor takes them back to his office.
What do you think will happen next? Here’s a hint… the investor will not eat all the doughnuts. He will sell them for whatever he can. Where are we today in this scenario? Well, the lenders of real estate are the “investor” in my analogy.
The investor is loading his doughnuts into his truck and the shop owner is still trying to sell doughnuts for $1.75. No one is buying them. So, here is what everyone in the investment real estate market is trying to figure out… what will doughnuts be selling for in a few months or a year from now? $1.75? $1.00? Less than $1.00?
I’ve been in investment real estate for over 20 years and I don’t have the answer because I don’t have a crystal ball. I am sure of one thing. Doughnuts are not worth $1.75 when no one is buying them! Buy a bagel for $.60 and put some frosting on it. There are other things investors can do with their money and they are doing it.
USA Today : September 26, 2007
The following stories were in yesterday’s USA Today. California has 8 of the 10 most expensive real estate markets in the country and sales have dropped 20-40%. Prices have not come down. Sounds like really expensive doughnuts to me. I want to buy them from the investor in bulk for $.90 per doughnut. In the next six to twelve months, I think they will be available. Now, I just have to reduce the trans-fat in my diet!
