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An Evening with Alfred Gobar
Real
Estate Economist Addresses the $65,000 Question
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April 4, 2006
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The $65,000 question. A bubble? Irrational
exuberance? Where is the economy taking us, especially with regard to
real estate. I recently attended a talk by
Alfred Gobar, the renowned real estate
economist and founder of AGA (Alfred Gobar Associates), a real estate market research
firm that investigates market feasibility for a wide range of land use
development ventures.
The Key Variable in Real Estate
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Employment
The key variable in assessing the strength or
weakness of the real estate market, according to Dr. Gobar, is employment. Moreover, the factor which
correlates best with the housing market is employment (not
population). In the early 1990s, prices plummeted when Southern California lost hundreds of thousands
of aerospace jobs. However, those jobs have already been lost and the
region is not as vulnerable to an industry downturn as it was at that
time. While he sees the housing market softening, he does not see a
dramatic downturn in prices like we experienced fifteen years ago.
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Beating the Law of Supply and Demand?
Dr. Gobar also
discussed the effects of government decisions on housing prices. For
example, he noted that local zoning policies created an inversion in land
value. In order to try to collect more in taxes, municipalities have
over-zoned for commercial uses but not enough for residential. The
zoning allocations create an artificial market. Now, zoning
decisions, such as smaller lots and higher density, are changing that
market. With regard to governmental subsidies for “affordable housing,” he noted that the influx
of government money skews the market and drives up prices. Although
they think they can, the politicians cannot beat the laws of supply
and demand. These subsidies do not achieve what they set out to do.
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Rising Interest Rates
In a macroeconomic sense, Dr. Gobar noted two negative trends: the negative balance
of trade and the declining value of the dollar. However, both the
federal debt and the federal deficit did not concern him as much. The
debt has, in the past, been higher as a percentage of Gross Domestic
Product. The deficit is not high in comparison to other countries nor as high as it has been historically. He does
foresee interest rates continuing to rise.
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Supermarket Struggles
Dr. Gobar addressed
some of the rules he uses in evaluating retail properties. For
example, his rule of thumb when looking at strip centers is that
anything over 30,000 square feet of floor space is too big for the center’s trade area and he would not own it. For neighborhood shopping centers,
he avoids drug store anchored centers since they do not generate the
repetitive traffic that a supermarket does. However, he also believes
that a lot of supermarkets will close in the face of competition from
Wal-Mart and larger power centers.
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Low Cap Rates:
The New High P/Es?
Overall, Dr. Gobar feels we are in a “bubble” based on the low capitalization
rates for property right now. In the housing market, he noted that
speculators are putting up deposits for properties and watching the
prices while the property is constructed. Although developers try to
stem speculation by requiring written agreements by purchasers that
they intend to live in the property, these agreements are not
stopping the speculators. He believes that prices may dip as
speculators get out of the market. However, he notes that he does not
see the same decline in commercial properties because most mortgages
are at fixed rates and buyers are more likely to hold these
properties than sell them at the same or lower price.
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Laine T. Wagenseller is the founder of Wagenseller
Law Firm, a full service business and real estate law firm in downtown Los Angeles. The
firm represents real estate developers, businesses, property owners, and
investors. For more information visit www.wagensellerlaw.com or contact
Mr. Wagenseller at (213) 996-8338.
Sincerely,
Laine Wagenseller
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