FINC 677 & LDEV 664:Mighty Thor & Real Estate.

Today we had in class two visitors: Thor Thornhill and Stephen Hanz. They come from HMT Engineering & Surveying, based in New Braunfels, Texas.
(Sorry, not Mjolnhir)

Thor Thornhill worked in banking first, and then started studying at the MRE program at Texas A&M University (which was called LERE back then). He worked at USAA for 2 years, and then started at HMT Engineering & Surveying.
Stephen is the Civil Engineer of the firm, he is from class 92'. He is the civil engineer behind Schlitterbahn's water park awesomeness.

A few highlights of their presentation:

• They design the water, the streets, the drainage, conduits & anything underground.
• They hand of their plans to a contractor for their client, and then the contractor starts moving the dirt.
• They also do land surveying: As we know, there are pins buried in the ground of buildings everywhere so we can find where our property corners are.
• They do anything from commercial, residential, to water parks.
• One of their biggest projects was a Hospital Campus, a 55 acre project worth 330 million dollars.

FINC 677& LDEV 664 Task #2: An inspiring piece of Real Estate.

A Fascinating parcel of Real Estate

As the most fascinating parcel of real estate, I think I should talk about some piece I've seen with my own eyes and not on a picture. As Peruvian I guess I feel the necessity (or even the obligation) to refer to Macchu Picchu (despite may sound a bit mainstream, don't know how many times I have heard of it). I have had the opportunity to be there 3 times in my life. Only realized how magnificent was on the last trip which was not so long ago.

Don't be fooled with the happy faces. We were almost breathless.

A big citadel made out of big and heavy stones, constructed on a tall mountain, surrounded by the Vilcanota river. According to the History Channel the best explanation for How did the Incas manage to take such heavy rocks crossing such an abundant river and to the top of the mountain is:

LDEV 664 & FINC 677 Task #3: The woodlands

So yes, I picked The Woodlands. I justify my election in the fact that there is a Disney Store in The Woodlands Mall. (Just kidding).
According to city-data.com, the population in The Woodlands from 2000 to 2010 grew 68%. I honestly picked this place basically because I've gone over there quite regularly. Not like I know many places in Texas but I had a gut feeling that this would be a good pick. So decided to run the numbers as was taught in class and these are my findings:

The Woodlands has a Total Basic Employment of 6308.64. As seen in Figure 1, it has 5 basic industries (Those with Location Quotient >1) : Agriculture, Wholesale trade, Transportaion and Warehouse and utilities, Finance insurance and Real Estae and Professional scientific and management.

With these information, we can get the Static Ecomic Base Multiplier. In this case, The Woodlands has an EPM of 7.15. This would allow us to conclude that if an additional 100 basic jobs were brought here, it is highly probably that 615 non-basic jobs would be available.

Finally, I think there is another fact that we should take into account here. Exxon Mobile is building is new campus just south of The Woodlands.
Exxon Mobile campus is expected to have space for almost 10,000 employees, and will bring 2,000 new basic jobs to this area.
Information gathered from: http://factfinder2.census.gov/faces/nav/jsf/pages/index.xhtml

FINC 677 & LDEV 664:: An updated introduction

So, here we go again. Now, I am in my 2nd semester, I am no longer really new in this town (Aw.), I have learned a lot of things, but some things that does not seem to change are Dr. Peterson's blog tasks. (It's ok, I know is to practice our writing skills, and probably I should be particularly grateful.). Since it is a new class, I could have just created a brand new blog and repeat everything I said before but instead I decided to continue this one and actually talk about something new.

This is why I decided to call this introduction task an "updated introduction". So, have you seen those chapters in some series in which the whole chapter is a recap of everything that happened in the past chapters but nothing new? Boring right? Well this is not it, so no worries. I will talk about myself yes, but I will add those things that have changed in me and my goals after 8 months studying in Aggieland.

Let's get started then.

My name is Carla. I am now 26 years old. This is new I was 25 last time! I still enjoy playing videogames when I have a chance, reading, sleeping, swimming but this summer I added a new hobby I enjoy a whole lot now that walking is a pain because of this infernal summer: Biking. Riding the bike around the campus is amazing and I do not feel trapped at home anymore. I now rock the roads so good for me!

I am a Lawyer but there was a last step I did not get to do before starting my Master's in Real Estate and it was getting my star. Yes, in Peru at least, Lawyers get a star.

Look at that star!

Right after final exams finished, I had a great time with the professionals from the accounting and audit firms at our EuraAudit Annual Meeting which took place in Paraguay. 

Spring Task #4: Dr. Dotzour and the Economic Outlook.

Last Monday we had another guest in our class: Mark Dotzour, Ph.D. He is Chief Economist and Research Director at Texas A&M University's Real Estate Center and he has been working there for 15 years. He got his Ph.D from the  University of Texas.

In his presentation he talked about something that we probably already know is important, but we usually forget to take into account: The big picture.

Dr. Dotzour showed the class how everything is correlated in the economy,  and how changes in any of the components of the economy will have an effect in the markets, like when you change an assumption in your Excel Model. This became even more interesting because he emphasized on how these economic components have an effect on the Real Estate Market specifically. Now, what are these important components?: the consumer, the government and the businesses. This 3 components interact and are responsible for the well being of the market.

He emphasized on how important it is to understand the consumer's expectations and to exceed them. He also showed charts to illustrate how important it is to understand the job growth in the economy: When the corporations are making profits they want to hire workers: but when they are not making profits then they start laying off people.

He also mentioned the fact that in the case of the Real Estate industry there are not enough skilled laborers. I do not really know how the Real Estate development works in terms of hiring. I know in Peru, it is pretty informal, the workers from a construction site are not payed per hour, are payed per day and poorly. Sometimes they are people that learned with years of experience and necessity; and sometimes they are just young people that need to work.

I would also add the fact that corporations look for cheap workforce and they sometimes do not care as much about the skill of the worker. I saw this myself when I worked for a winter as a lifeguard during my school vacations. Some students did not care as much about the job, some others barely passed the chemical exams or basically cheated because the whole course was in English and they barely knew the language. Yet, they were still hired for 7 to 8 dollars an hour. This happened during the winter from 2009-2010, no idea if this has changed but I have heard from other experiences that these situations are kind of common in the U.S.  

Now, to end this entry, here is some good advice that the class learned from him:

First if you do not understand how a certain area of the business works then do not invest in it. You need to know how the business work in order to trust it.

And finally, the best investment is in your own education. This is true, just like my grandpa used to tell me: "People may take everything away from you, but there is something that anyone will be able to take away from you and it is your education. It is stored in your brain, and that is the best we can give you because it will be bound to you forever." And that is why I am very happy to be here and I appreciate every dollar my parents are investing in my education.

Spring Task #3: An overview of Dr. Gaines' Presentation. Inflation vs Deflation and the effect in the Real Estate Market.

"The  definition of economics is the science of taking common sense and making it unintelligent." - Dr. Gaines' quote about how every relation and effect in the economy is just disguised common sense.

The newest guess to our class this time was Dr. James P. Gaines and he made a presentation which he entitled as Real Estate Markets, Investments and Risk Analysis. A very enlightening presentation. Why was it enlightening and not just interesting or any random adjective that could pop in my head? Glad you asked. 

So as it is common knowledge, U.S.A. went into a big recession in 2008-2009  and as Dr. Gaines explained, generally after every recession, U.S. economy has gone up within the next year or two, in other words, the economy has been able to rebound pretty quickly. But, it hasn't happened that way this time. So, what is different? That this was not a business cycle recession, this was a debt deflation recession. 

Everybody (Businesses, Government, Households, etc) got over levered. There was too easy  and cheap credit, so everyone borrowed a lot of money. The consequence: Price bubbles. At some time it will go up, and at anytime it would burst in our faces, just like it did.

Generally, since World War II,  the responsible factors for the recessions were interest rates, inflation and inventory adjustments by businesses. For this reason, when there was a down cycle it was corrected. But this can't be done in a debt deflation cycle. Since the worst period in Peru was by the years 1988 to 1990 due to Inflation, my skin crawls when I hear the word Inflation. Apart from Justin Biebber and Joffrey Baratheon, I thought that a High Inflation (like the one that happened in my country) was the worst thing that could happen in a country. 

Deflation, just the opposite of inflation when the prices go up, is more troublesome than the inflation itself according to Dr. Gaines. The last deflation that happened in the United States was in the 1930's, great depression. 

Great Depression.

There's been only 4 debt deflation recessions in the history of United States. What is interesting is that economists figured out that when you have that kind of market collapse, there is no cure. The government has tried everything in these situations: Monitored the market, lowered interests, etc, but that does not guarantee a cure. The only cure is time. Generate productivity by putting people to work. The consumer confidence is very important.  Nobody was confident about anything during the last recession. People would work and was careful in saving money and did not want to spend. Now consumers are slowly gaining confidence and starting to spend more, and thus the prices are slowly inflating.

Now, what is the effect on the Real Estate Market?

As we know, the Capitalization Rate is the ratio from the relationship between income and overall value (price). Deflation and Cap Rates also have a relationship: When Prices go down, Cap rates go up. Dr. Gaines explained that this inverse relationship  is always true. Now, prices in Real Estate are inflating. Prices are slowly coming up now and Cap Rates are slowly coming down.

Well, to illustrate the problem, Dr. Gaines told us that not so long ago he talked with someone who was buying apartments in Houston for 4.5% Cap Rate, which is a pretty low cap rate. You as buyer do not want a low Cap Rate, you want a high cap rate because then the price will be cheap. But as a seller, of course you want a low cap rate, because then you will make good profit out of it.

The situation here is that due to the last recession, Cap Rates are too low right now. Cap rates have the same principle as the P Ratio in the Stock Market. If it is too high, you start thinking: How am I going to make any money?

Then Dr. Gaines explained a fact that I found really interesting: In Real estate one of the first things you think about is: What am I going to get when I sell the property?  As a investor in real estate you are not only concerned on the rent income that you are going to make. You know that after a holding period you are going to sell and of course you expect to make a profit. Well if you are paying such a high price at the beginning,  how are you going to sell it (the property) for more than that high price somewhere in the future if the Cap Rates are going up (And thus, the prices are going down) due to the slow recovery of the economy?

Colophon:  Dr. Gaines also talked about something I found very interesting and I wanted to share it here. Two of the biggest commercial developments in the world are going on in Houston, just outside The Woodlands. One of them is Exxon Mobil Campus. Yes, Exxon is constructing its corporate world headquarters, which has a size of about 386-acres. I looked up some more information about it and here is a photo. Looks pretty awesome and I heard they want to make it better than any of the Google Campuses. 

Will they achieve their goal?

Spring Task #2: A brief walk into the U.S. mortgage credit history

Dr. Harold Hunt gave us a quick tour in time, from 1900 to our time, and here is an overview of what we have learned. Not for nothing did he open his presentation with this famous saying (and indeed, one of my favorites): "Those who cannot remember the past are condemned to repeat it".

In the early 1900's, the "Building & Loans" concept arose. Families from the working class without access to banks started making a pool of money, to eventually build a house for its members. These members would buy "shares" from this "cooperative" in a monthly basis in order to build up funds and eventually borrow money from these funds to build their own house. The key for this was trust. The deposit insurance as we know it today didn't exist by that time. So everything was based on the trust they had of its members.

To have a bigger picture, let's remember what had happening in the world: In 1914, an assassination attempt to an Archduke succeeded therefore triggering a diplomatic conflict which ended in what we know as World War I (On the bright side for the commerce, Panama Canal opened around this time too). A war brings nothing good ever, in this case though, unlike in World War II, U.S. played a safe role. U.S. joined the Alliance and brought not only military but more importantly, economic power staying almost at a distance and remained almost unharmed. I say almost not only because of the soldiers that were sent to this war and died in battle, but mostly because of what came after. The human toll was terrible with over 37 million deaths, but for these matters let's focus on the economic aftermath: At the end of the war, the allies spend all they had (and what they did not have) in the war. They were broke, and had a huge debt with U.S. who continued lending them money during the last years of war, despite there was nothing to support these loans (The British empire alone owed around 4.4 billion U.S. dollars which of course could not be payed). Yes, everything is about lending money, making a balloon, without the proper risk information. War ended, U.S. demanded the repayment of the debt and of course, how? If these countries were turned upside down nothing would drop from their pockets. It was almost foolish or rather inhuman to do so (Sorry guys). Here is when it gets as it always gets: The repayments were partially funded by German reparations, and these then were used to support these American loans to Germany. Circular system. Speculation. "Never ending" wealth period. Easy and Risky loans. Sound familiar?

 
 This said, explains better the scenario of 1929: Wallstreet ka-BOOM. Around 20% of all banks went out of business. Guess who stayed almost unharmed? Building and Loans were only affected by 2%. By 1930, 3 to 5 year mortgages phased out and 20 year amortizing loans better known as "savings and lending" stepped in. The fear of not being able to take your money out because the bank lost it all was there, so the deposit insurance made its appearance. This created trust in banks again. Short note: 1933, a smart man with a true conviction that there is something wrong with Jews and therefore they shall be exterminated became chancellor of Germany.

Something was being cooked in the other side of the lake and in 1939 World War II starts. Despite this, during 1940-1950 period there were low inflation and stable interest rates. Financing long term loans with short term deposits worked.

Yet by 1956 U.S. took a direct role in the Vietnam War spending even more human and economic resources, thus increasing inflation by 1960. Short-term interest rates were no longer profitable and on contrary, lenders were loosing money. Now, Savings and Lendings provided about 45% of all single families mortgages. Then in 1966, Regulation Q capped interest rates payed by banks and S&L's to its depositors.

Now, we quickly move to 1970: Money market mutual fund with no interest rate caps arrive to compete and S&L's start loosing again. In 1980, the deposit insurance level was raised from 40k to 100k per account whereas the MMMF's were not protected. As a result: our clever depositors moved back to S&L's and continued not monitoring how the money was managed (let's face it, even today, who monitors how our banks invest the money?). "go-for-broke": win and make money or loose and let deposit insurance take care of the mess. Cool, Uh?

No, not cool. And here is when this gets even less cool: 1981 Economy Recovery Tax Act. What would happen if I tell YOU, random investor, that instead of paying taxes based on your gross income, you can now first take your loss from the building out of your gross income and then pay taxes based on the remainder? Want to invest right? Well yes, Real Estate supply boom is what happened. This tax shelter favored limited partnerships and the investors were massively investing in Real Estate. Guess who appeared again: Risky non-recourse loans were given in the assumption that the oil price would remain always high.

President's Reagan signing the Economy Recovery Tax Act from 1981: "And this represents 750 Billion dollars in tax cuts over the next five years and this is only the beginning..."

Long story short: S&L's were still in trouble. Congress in its infinite stupidity wisdom recognized the damage and then opted to bill the 1986 Reform Act which backtracked the tax shelter... but didn't trace back the damage: Commercial Real Estate market massively overbuilt, a huge amount of risky non-recourse loans turned into bad loans and who says the economy doesn't have timing? The oil priced collapsed too.

By the late of 1980's, more than 1000 Saving and Lending became insolvent due to lender misconduct and fraud. This story goes on but Lehman brothers and the depression of 2008 deserve an individual entry don't ya'll think? (yeah, let's get a bit texan)

Well now, about an interesting Freehold Estate issue. I will talking a bit about the dispute between our Peruvian Cardinal versus the Pontifical Catholic University of Peru (Better known as PUCP). Here is a link in English to have some information about it.

Cardinal Cipriani vs Pontifical Catholic University of Peru

This is already a mediatic dispute and has brought several theories and discussions in my country. In my case I am a bit divided here, but let's start with the technicalities: This is a Fee simple condition subsequent, meaning that this freehold estate is conditioned to the occurrence of a certain event or in this case, of the not occurrence. The land in which the PUCP was built in was once part of the patrimony of José de La Riva-Agüero y Osma, who was an Peruvian historian and a politician and who's last will was to leave this land for the University. Here is when this gets tricky: the board had to be formed by a representative of the catholic archbishop in Perú and the Dean and they would run the University. In the first testament, the board were to stay this way for 20 years; on the newer version of this testament, the board's structure had to remain this way to ensure that this school was always Catholic.