The World Is Flat! Thank Goodness… Kinda

There were several interesting items of note it this morning’s paper some good, some not so good.  First and foremost is that it was reported that Southern California prices were flat for the second consecutive month.  Whew!  For a minute or two it was starting to look like a bubble was in the making.  If you’ve been following the Real Estate Conversation for any length of time, you know by now that my position was that the pendulum swung too far and that the rise over the past twelve months was simply a correction; that we bottomed between 2009-11 and that we should be entering a period of sustained stability with modest price appreciation going forward.  Thus the report of ‘contiguous flatness,’ is indeed welcome news.

Inventory in Southern California stands a little over 2 months.  The general consensus is that 6 months inventory is a balanced market, neither favoring buyer nor seller.  I maintain that California must always be in a perpetual state of shortage to justify our high prices.  At just over 2 months, we are nearing a more balanced market of 3 months inventory.  So in this case, flat is good.

The second bit of good news was that California is set to raise the minimum wage to $10 per hour.  While this will roil many small business owners, improving incomes is the only way an economy can grow and sustained property appreciation is possible.  If incomes don’t rise, neither can prices.  By and large, the recovery from the Great Recession has been void of real income growth, so any income growth, is good at this point, even if it comes at the hands of Big Government.

The last thing I found interesting was not so good and really points to one of the fundamental problems the United States faces and that is that Big Business is not spreading the massive wealth they are accumulating with their employees, in the form of higher wages, increased hiring and business expansion.  Rather they are rewarding a smaller group of investors.  What I am referring to here, is the trend of corporations buying back stock, in an effort to boost stock price,  rather than invest their profits in their people and their business.  To what am I referring you ask?   Disney announced that they are buying back $8B in stock.  $8 Billion, as in with a ‘B.’  So why does this trouble me?  Quite simply, instead of taking their enormous cash surplus (profits) and putting it to work by expanding, or through acquisition of other companies and/or equipment (computers, networks etc.) or for that matter, employee bonuses for a job well done, they are going to boost their stock price by becoming a big buyer and thus driving the price up.  Why you ask?  As the supply of Disney stock decreases, the demand for the remaining shares increases, and thus so does the price.  We are seeing this all over.  Amgen announced something similar last year as did Apple and in fact most of the major corporations have been making similar announcements as they get wealthier and wealthier.  The cash that Corporate America is sitting on today is in the Trillions, as in with a ‘T.’  So again, rather than use profits to expand business, expand hiring, increase wages thus creating a population more able to purchase the goods and services Corporate America makes, they are giving it back to the shareholders.  And sure, some of the employees own the company stock so they benefit by a rising stock and many others own some of these companies in their 401K so there is some benefit there as well, and yes some of those who have improved wealth via their rising portfolio will spend more on items they would have otherwise forgone.   Buying back stock however, does very little to increase employment and incomes.  It’s just a cheap way for stagnant thinking executives to raise their stock’s value as opposed to raising its value by increasing the size and scope and profitability of their business.

So the good news is that the real estate market is normalizing and the minimum wage is going to increase so we may actually experience a little much needed wage inflation.  The bad news is that Corporate America is still business as usual and that is not good news for anyone and certainly not real estate.

About Tim Freund

Tim Freund has been a licensed real estate agent/broker since 1990. He spent 14 years as a new home sales rep, ran his own boutique resale brokerage for 5 years and is currently an Estates Director for Dilbeck Estates/Christie's International Estates in Westlake Village, Ca. Tim is a Certified Residential Specialist (CRS), an Accredited Buyer's Representative (ABR), a Corporate Mobilty Specialist (CMS) and a Senior Real Estate Specialist (SRES). Tim has successfully negotiated a loan modification for a client and is a professional short sale negotiator. Tim has been married 28 years, has 2 children, is a native Californian and has been a resident of the Conejo Valley since 1991.
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One Response to The World Is Flat! Thank Goodness… Kinda

  1. Chuck says:

    You are right on the button. When companies have too much cash, they become takeover targets. They can be bought using their own cash. Management does not want that to happen, because in a takeover they lose their jobs.
    So they have two choices as to what to do with this extra cash. One is to just give it back to the stockholders as a dividend. But generally management does not have much stock, only options, so they would not get any cash. The other is to raise the price of the stock in the manner you described. And bonuses (cash bonuses) are paid to management based on the price of the stock. A little self-serving, but the system works. You want someone to behave in a certain way, give them a reward and they will earn it.
    Oh, year, you can also invest in new equipment, and people and plant, but it takes a while to get a return from that, so this is the quickest way for management to get cash out of a company.
    For a real estate guy, you sure know a lot about management, economics, and psychology.

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