Wednesday, November 11, 2009

The Dallas Fed Chief...

...recently gave a speech that pretty much explains why municipalities should not expect increased land development anytime soon:

I am wary of the consensus view. For a good while now, I’ve suggested that we are more likely to see a more uneven recovery—not a “V”-shaped recovery but something more akin to a check mark, where the elongated arm of that check mark inclines at a slope that is less than desirable and might possibly be repressed by an occasional pause or several quarters of weak growth.

Why a check mark?

Several recent sources of strength are likely to wane as we head into next year. Cash-for-clunkers and the first-time-homebuyer tax credit have both shifted demand forward, increasing sales today at the expense of sales tomorrow. Neither of these programs can be repeated with any real hope of achieving anywhere near the same effect: The more demand you steal from the future, the less future demand there is for you to steal. The general tax cuts and government spending increases included in this year’s fiscal stimulus package won’t have their peak impact on the level of GDP until sometime in 2010, but their peak impact on the growth of GDP has come and gone; the fiscal stimulus continues to drive GDP upward, compared with what it would otherwise have been, but the increments to GDP are beginning to shrink. And, as we all know, the shot in the arm that our economy is receiving from inventory adjustments is, while welcome, inherently transitory.

The comment on the first-time homebuyer tax credit is especially informative.  In fact, in my last Land Planning class, we spent most of the session discussing the phenomenon of "shifting demand forward". 

The concept is simple...yet extremely dangerous in practice.  In the context of land development, it goes like this:

1.  If you convince someone to buy a house NOW with near total debt instead of LATER when they've saved up some equity to go along with that debt, you've basically cut their future earnings because they've now spent what they have yet to earn.

2.  Granted, that's how credit works but we're not talking short-term revolving type credit here (the kind used to finance inventories for businesses).  Instead, we're talking about long-term debt whose interest eats into future earnings at a consistent rate (and, in the case of ARMs and other loans whose initial interest rates subsequently increase, growing rate).

3.  This creates a "perfect storm" against land development.  All the demand that exists today for houses and other structures PLUS the demand that will exist years into the future, is now prematurely realized today.

Thus, most laws and regulations that facilitate this, are essentially Red Bull in nature.  That is, they give a short term burst...followed by a hard, draining crash in demand.

If you are a municipality hoping to bide your time to see property tax and development fee revenues return, then the wait could be longer than you (and your budgeting process) thinks.

--Chad Emerson, Faulkner U.

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