Monday, July 6, 2015

Real Estate Is Great, Unless You Pick Wrong

I mentioned in my review of Maritime Economics that ships were a bad investment and had underperformed Manhattan office real estate, which apparently quadrupled between 1980 and 2000.

That was, of course, an unfair comparison. After all, what if you passed on dry bulk carriers in favor of real estate, but bought real estate in Detroit or St. Louis instead of Manhattan?

If you have ever been to the northern Wisconsin towns along Lake Superior, it is obvious that their fortunes peaked in 1900 or so, based on the dates that (quite impressive) churches and public buildings were put up.

One town had a population of 6,000 in 1900 (now 2,000) and at that time had three daily newspapers!

This particular instance of decline is because the exploitation of iron bearing minerals in the Gogebic Range reached its conclusion, but it reminds me of Steve Sailer's observations of a winner take all effect in cities.

I don't think a person in Ashland, WI would have felt like he was missing much that could be had in Minneapolis in 1900. But that has changed, and in the winner take all contest in the midwest, the northern Wisconsin towns lost and Minneapolis won.

A house in northern Wisconsin goes for only $60k now! Very poor 100-year return compared to Minneapolis or even Duluth.

How do you know if your local industry is going to dry up and blow away, crushing your real estate value and personal earning prospects? (Also devaluing your social capital because two-thirds of your town is forced to move away.)

What if northern Virginia is the next Gogebic Range? They're remarkably good at extracting money from the taxpayer, but what if the taxpayer became more reluctant or simply has less to give? Better people have suffered worse business misfortunes than that.


whydibuy said...

It is interesting to see historic photos of logging and mining towns and operations from around 1900 in Canada. Today you can hardly tell that there was development in those areas. Nature has totally taken back the real estate.
These are good reminders that wealth and prosperity are fleeting and that things change. Like its said, the only constant is change.
You mention Detroit. Its fascinating to see the ruins of Detroit and contemplate on the reality that at one time in the past, those grand hotels and apartments were valuable real estate. Those ruins once provided great wealth and cash flow to their owners. And you wonder about the whereabouts and histories of the owners of those properties. Did they get out at the top? Or did they ride the property all the way down into abandonment? I wonder.

James said...

nd you wonder about the whereabouts and histories of the owners of those properties. Did they get out at the top? Or did they ride the property all the way down into abandonment? I wonder.

My father grew up in Detroit. His parents sold their house in the early '70s after white flight had begun and took a loss-- they sold it for less than what they'd paid for it years earlier, although how much less I don't know.

bjdubbs said...

Whoa, picking on northern Virginia? I would think Minneapolis is much more likely to be the next Detroit. NoVa is actually much cheaper than DC - nobody moves to the nation's capital to tell the folks back home they live in Fairfax. So a house in an "up and coming" (loiterers on the street corner all day long) DC neighborhood will sell for more than an equivalent house in the Va suburbs. Drive out to Tysons and you can see big buildings for Microstrategy, Paychex, CapOne, so it's not totally dependent on the Feds. It's true that the end of the war put many of the "beltway bandits" out of business and we've already seen a bit of a mini-depression in the outer ring of office buildings. But that's normal up and down.

CP said...

Did they get out at the top? Or did they ride the property all the way down into abandonment?

Well, by definition each property has been owned by someone continuously to the top. It could have been one person (unlikely) or they could have changed hands multiple times. That would mean that multiple "falling knife catchers" bought what they thought was the low in Detroit real estate, only to have to sell out even lower.

James said...

In the 1980s there were some vulture investors who bought houses in Detroit for a few thousand dollars, rented them out for 2-3 years until the tenants trashed them and they became uninhabitable, and then abandoned the properties. The city government didn't have the wherewithal to track down deadbeat landlords at that point, much less sue them for back taxes.

AllanF said...

Not sure I remember enough of the details to find a link to the original, but some number of months ago NPR did a piece on the randomness of California's middle-class millionaire reality lottery.

The part I recall was the guy that took a promotion (hey, promotion!) which moved him from the Silicon Valley to the Central Valley sometime in the early eighties. Big. Mistake. He could have stayed put, flipped burgers, and retired today a far, far wealthier man.

CP said...

Allan, that's a perfect example.

ADL said...

A friend of mine recalls defaulted 1-bedroom apartments in her Hell's Kitchen building selling for $30,000 in the early 90s, half of what they'd sold for a few years earlier...I looked in 2000 at coops in Harlem which sold for only 50% more than they had--nominal, not inflation-adjusted--in 1960...

Nate Tobik said...

In northern PA there is a state park, Oil Creek State Park. They have a wonderful backpacking loop there, about 25-30 miles around the edge of the park. Beautiful hills, along a river, a really nice area, very wooded.

What makes it interesting is this was the location of where oil was discovered in the 1800s. There are plaques in the park showing pictures of what the boomtown looked like 100+ years ago. This area boomed and went from 250 residents to over 10,000 residents in a few years. Oil was found and commercialized in 1859, and had peaked in PA by 1891. It was on its way out in the Oil Creek area by 1871.

The state built a few reproduction oil towers and there are a handful of ruined buildings deep in the woods. There is also a scenic railroad through the area. But it's impossible to tell that 10,000 people ever lived in this valley, absolutely impossible.

While backpacking my brother and I mused about other places that are densely populated now that in 100 years might be a state park. It's a fascinating through. That in a bustling Target or Costco parking lot picnickers could be eating, gazing at trees and flowers and looking at a plaque that said "Here stood Meadow Brooke Crossing Shopping Center in 2015, a bustling center of commerce for 21st century shoppers."

What is most amazing to me is that there are cities that have stood the test of time. These old world places that still exist. There are hundreds if not thousands of formerly prosperous cities that are now nothing, just dirt and nature, lost to the sands of time.

CP said...

I was reading about the Erie Canal, and how Baltimore (rightly) felt that New York's cheap access to the west via water threatened to make Baltimore less economically important than New York, which led to the building of the Baltimore and Ohio railroad.

But the amazing thing (from our perspective) is that Baltimore ever felt that it was in the same league as New York!

CP said...

Once cities reach a critical value (of age and/or population) they seem to never go away. Even if they are bombed flat.

At least on a 1k year timescale. It could potentially not be true on a 10k year timescale.

Actually... Ur lasted for about 3,000 years but was eventually abandoned. Nothing lasts forever.

Another city pair besides Baltimore/New York:

Chicago got its start by marketing midwestern grain, lumber, and meat. It beat St Louis because railroads beat barges. As an example, the changing seasonal height of the Mississippi River made it hard to site grain elevators along the riverfront in St Louis, which made Chicago the better city to site grain elevators.

I had a ~30 yo friend tell me recently "real estate never loses money."

Yikes! And we are only 1.5% up from the interest rate lows.

CP said...

"In the mid-19th century, the railroads won out over the river boats in a bitter struggle for supremacy in transportation. This helped establish the mastery of the Great Lakes and East Coast ports, and strengthened the economy of the North."

Anonymous said...

July 2015:

Minneapolis is much more likely to be the next Detroit.