10 Pricey Cities That Pay Off
Chinese official urges buying of US land
| You’d have to read a lot of mainstream articles before you’d come across any that mention how the economy really works. Here we found three of 2009 from: (1) The Wall Street Journal, Jun 22, on land deals by Michael Corkery; (2) US News & World Report, Jun 23, on amenity value by Matthew Bandyk; and (3) MarketWatch, Jun 24, on Chinese advice. |
by Michael Corkery and by Matthew Bandyk and by MarketWatch
- Land Deals Help Builders Stay Alive
While the recession wiped out many small builders, mortgage lenders, and homeowners, the nation's biggest builders have hung on, in part through favorable land deals, loan agreements, and tax strategies.
Timely land deals have been critical to the survival of Lennar, based in Miami, one of the largest homebuilders in states hit hardest by the housing collapse -- California and Florida.
Lennar pulled off two deals that got lots of risky land off its books before the market fell apart. The buyers: Morgan Stanley Real Estate Fund and the California Public Employees Retirement System, the giant pension fund known as Calpers.
Lennar also entered into joint ventures to buy land, reducing its risk by not guaranteeing most of the $5 billion borrowed by the ventures.
Lennar reported revenue of $4.6 billion last year, compared with $16.3 billion two years ago. Lennar's shares are up 128% since November, although they remain about 88% below their January 2006 peak.
Other publicly traded homebuilders also dumped land during the crunch. By selling land at huge discounts to what it was once valued, big builders generated large losses for tax purposes. By applying those losses against profits during prior years, they have collected about $2.55 billion in tax refunds this year.
As many as half of the nation's privately held builders have shut down during the housing bust. The smaller players had loans cut off by lenders and are dying off in droves, surrendering market share to the big players.
Lennar's land strategy was honed during previous downturns. Over the years, builders have gone bust because they took on too much debt to buy land, then were left insolvent when land values plummeted. Lennar decided one way to avoid that fate was to spread the risk to others and limit the debt on its balance sheet.
Getting inexpensive land will be critical to builders' future profitability because new-home prices aren't expected to rise substantially for many months.
JJS: Thus wealth concentrates, due to those who control credit and favors from government.
- 10 Pricey Cities That Pay Off
Despite the housing downturn and the number of cheap houses it has left in its wake, there is still plenty of expensive land left. New York might have slipped from the second-most-expensive city in the world in 2008 to the sixth most expensive in 2009, but an average 120-square-meter (373-square-foot) apartment in the central business district still costs $14,898 per square meter.
The location brings a certain quality of life: How nice is the weather where you live? How close are you to the coast? How many cultural and recreational opportunities are nearby? These quality-of-life factors help explain why housing costs are so high.
Another big component is how many goods does the city produce that other people value? The San Francisco area has Silicon Valley. New York has Wall Street. Productivity boosters can come in other forms, such as universities that produce an educated workforce, easy access to water or other transportation, or proximity to natural resources. Residents of highly trade-productive cities tend to enjoy higher wages. What's more, businesses flock to these cities to enjoy the advantages. As incomes and employment go up, so do housing costs.
Here are two cities at the top of the list of most valuable cities, one big, one little:
The San Francisco area -- which includes Silicon Valley -- comes in first. There are high wages, but even higher housing costs, pushed so much above the wage level because San Francisco residents enjoy great weather, a thriving local arts community, and lively neighborhoods. But the business aspects of San Francisco outshine even the quality of life.
With a population of 400,000, the Santa Barbara CA metro area has the second-highest quality of life and third-highest trade productivity. The number of days of sunshine a city has each year, the higher its land rent. Santa Barbara's Southern California locale gives it plenty of sun. Another good predictor of land rent: proximity to a coast. For its beaches, the city has been dubbed the "American Riviera".
JJS: Once again, it’s location, location, location -- the value of which is generated not by any lone owner but by society in general. Hence society would be better off sharing that, not taxing labor or capital.
- Chinese official urges buying of gold, US land
A top Communist Party research chief said Thursday that China should buy gold and US real estate rather than Treasurys.
Li Lianzhong, who is head of economics at the party's policy research office, said the US dollar is poised for a fall, making gold and land better investments for China's $1.95 trillion in foreign exchange reserves.
It quoted Li as saying Beijing should also focus on buying up energy and natural resources. Earlier, China Petroleum & Chemical Corp. -- better known as Sinopec --said it had reached a deal to buy oil and gas group Addax Petroleum Corp. for $7.2 billion.
JJS: Depends on the phase of the cycle, but goods created without human effort almost always pay off more than goods produced with labor and capital.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: Foreigners with bucks snap up bargains as land hits cyclic lows
What’s really at work beneath the surface
The homeownership rate is likely to fall below its 2001 level ... |
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