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The Fiscal Cliff: Fact or Fiction?

Posted: 07/02/2012 6:50 pm

Here we go again. For a president who has been dubbed "no drama Obama," it looks like the American public might be in for some "rope a dope" this summer. From a real estate perspective -- an industry that yearns for stability given the drama over the past three to four years, a no-thrills approach in monetary resolution is sorely needed.

Like many real estate investors, such as myself, who have been sidelined the past couple of years -- and/or simply put in the penalty box because of our lack of self-restraint at the apex of the market, this Fiscal Cliff stuff could not have come at a worse time. What this political bickering does is essentially put some housing growth (not all mind you), but some housing growth in a suspended state of animation. And here are the reasons why:

• Mortgage lenders will be less likely to lend if economic growth slows down.

• If economic growth slows down, then nothing retards job growth then the threat of ending the Bush tax cuts (at least according to our 1 percent friends).

• If a slow-down occurs, then fewer people will be willing to buy homes.

• If fewer people are willing to buy homes, then housing inventories become more logged jam.

• If more shadow inventory builds up as a result of the log jam, then real estate investors may be less likely to buy (and/or sell), given the downward pressure on pricing, an increase in reserve requirements and holding costs.

Real Estate Creep (aka Mission Creep)

What this all leads up to is "real estate creep." As any astute investor will tell you, real estate creep is the gonorrhea of investment activity. No matter how much penicillin you may have back-stocked, there's no better "kill joy" then a trip to the clinic.

So unless you're William Buffett, Sam Zell or a hedge fund manager, who can or do buy single family homes in super massive bulk, then all the above is moot. As a comparison, mom and pop investors are similar to small business owners, in that they make up a large part of the buy side activity. As a component of GDP, small business owners and residential home investors are the worker bees that propel the economy forward and/or make up a substantial amount of the real estate investment sector at the grass roots level.

As an example, when big-ticket items start to fly off the self -- which economists define as washer and dryers, refrigerators, big-screen TVs, DVD players, etc. -- GDP usually increases, unless there is a net deficit on imports, which may drag down GDP. At the most fundamental level, these big-ticket items play a part in driving the economy to healthy and sustainable growth levels.

Real estate acquisition plays the same integral part in a complex economy. And as a result, "mom and pop" real estate investors -- who by and large think on a more visceral level than the monetary gobbly-gob just explained -- are more hesitant to buy and/or unable to buy single-family homes, condos, triplexes, etc., in a thoughtful and vigorous capacity, since they are hamstrung by "rope a dope" politicians that don't mind throwing the baby out with the bath water so long as they don't have to cry about it.

Fact or Fiction

The past several years have been a boondoggle for naysayers and snarky phraseologists who live to coin catchy terms. As an example: Carmageddon, Armageddon, 2012 Mayan Calendar, The Great Bargain, The Great Recession, and least we not forget, an oldie but goodie that brought in the new millennium, Y2K. And now there's Fiscal Cliff. And since I find some of these phrases way too smart for their own good, I can't even get my fingers to type Tax----n.

As for the Fiscal Cliff, it's a made-for-TV-movie concoction that exploits the uncertainty -- and sadly, the ignorance of the American public, that all hell will break loose if the Republican or Democratic parties do not fully capitulate to the each other's demands. In short, prepare for both sides to hijack your streaming conscious for the next several months.

These suits at least know how to utilize...or whether, manipulate the free press and public into biting off "hook, line and sinker." So in that sense, the Fiscal Cliff is absolute fiction, in that both political parties are maximizing leverage of a preconceived and manufactured event that may not occur.

Although there are in fact budgetary, monetary and accounting remedies in place to prevent these foreseeable hiccups, political vanity prevents many in each respective party in standing up and doing the right thing. For those elected officials who speak untruths and without reason of their own, but instead are puppets of groupthink, they are inglorious bastards.

As a congratulatory concession and final point on the Fiscal Cliff, I say touché to our elected noblesse. The 535 politicians that run this country know the machinations of leverage. Job well done! I've often considered leverage the "eighth wonder of the world." Use it wisely and the world is yours (think Tony Montana from Scarface who emblazed that adage in neon lights). Or on the other hand, use leverage foolishly and watch your world disintegrate faster than Donald Trumps' integrity.

 
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