Aware Brain

A prominent real estate broker in Manhattan recently was quoted as asking the question:

“When’s the bottom going to be — that’s the big question right now,”

This question is on the minds of many people, and projections of the “bottom” and “turnaround” come from every direction. In 2006, when there were widely apparent signs of a slowdown, leaders from the real estate, banking, and other industries predicted that everything would go back to normal in 2007. Then it was 2008. Now some people are saying 1010.

My first question when I hear a prediction of a turnaround is “Why?” How was that prediction calculated? In most cases the reply is just “well, it just has to turn around by then..” In fact, nothing “has to” turnaround ever. There is no law or rule that dictates a turnaround after so many years. Some predictions come from the historical data of prior recessions, that lasted 2 years, 18 months, or some other time period.

But those turnaround happened in that time period for specific reasons. Not just because some arbitrary time period passed. Does this recession, downturn, depression or whatever have the same characteristics?

Apparently not. Historically, many of the underlying mechanics which support home prices, stock values, incomes, cost of goods,and business values operated in a predictable range. They all were some multiple which was constant, and rose at some modest rate. Inflation was around 3% – 4%, home prices rose 4%, incomes went up a certain amount, and stock prices were a constant price-to-earnings ratio.

All of that was relatively stable until 1999. The needles started to move then. Home price increases went to 8%, then 15%, and over 25%. That sent incomes higher as builders tried to keep up with demand. Homeowners wigh more paper  equity took out loans, and spent the money on consumer goods. Factory workers made more churning them out, and salespeople made more selling them.

Financial firms figured out how to make a market on the increasing home values, and their employees incomes and company paper profits went up.

So what if the whole economy was built on home values, and what if those turn out to be an illusion? What if the real, supportable home values are those which existed in 1999? Assuming that, when does the economy “rebound?” Or does it ever?

And if the real level of the US economy is only that level, then everything that exists at levels above that need to be dismantled. In fact, that is what is happening now. For an individual, small business, or large corporation, the answer is to look at where the real economy is, and race to that point. Build your business, personal finances, and expectations around that point. While everyone else banks on false bottoms, and chases the market down, you can look ahead to where it ends up, and just be there first.

With that vision, it does not matter when it hits bottom. It could be 6 months, it could be 6 years. Who cares, you will already be operating under real conditions now, so that the dive to the bottom does not affect you.