 United States of America is still the most powerful economic influence in the world. If we choose to "drill baby drill", over the long run we will simultaneously erode Russia's financial ability to wage war on Ukraine and others by driving global energy prices down and slow inflation. This would begin the liberation of Eastern Europe from Russian influence through economic policy.
As natural gas supplies increase, we can re-route liquefied natural gas exports from China to Europe. As we engage Canada, open the Keystone XL pipeline, and enlist Mexico, we can reduce revenues to Russia and limit China's access to low cost energy resources. We can use our enormous energy resources to support our allies and weaken governments led by autocrats claiming a democratically elected mandate. As an economic policy, capitalism beat communism and ended the cold war in the 1980s and we can do it again. Russia and China both acknowledged the failure of their centrally planned economic systems and moved to a form of capitalism to retain their political power. As a system of governance, communism has no better track record. Supposedly free elections are overshadowed by fear, censorship, and oppression. A truly free people would not chose the ruthlessness that governs the two Asian nations. On equality and opportunity, Russia and China have made the political class in the two countries wealthy in a way that would make the robber barons of the early 1900's blush. While they pay lip service to their citizens, they coerce them into systematic oppression and trap them in long term poverty. The wealth creation of western economies and the spontaneous innovation of free people will always outmatch centrally planned economies and their political class. This is why they can't wean themselves off a form of capitalism. We should untether the us economy and demonstrate unequivocally that there is no economic system that can match it. We should not move forward with a 1960’s dual mandate of guns and butter. To leverage the economic strength of this country, we need to demonstrate the kind of fiscal policy that will firmly establish the United States as the global standard for fiscal stability, budget accountability, and credit worthiness. A United States Government that is not dependent on its allies or aggressors for financial support would demonstrate the impact for good that free markets, free governments, and free people can make in the 21st century. On defense, we should be the most respected nation in the world both because of our capability and our restraint. If we can’t lead from the White House, we should lead from the respective states. Let states set in motion a wave of capitalism and freedom that will demonstrate the influence for good that God given rights protected by Constitutional governance, including life, liberty, property, and the pursuit of happiness can have on the lives of our people. Real estate markets in 2021 showed historic gains as prices soared on low inventory.
Looking ahead, these six drivers will impact housing markets in 2022. Population Shifts The trend toward the south and the intermountain west accelerated as employers became more flexible with work-from-home options and higher-ed has expanded online learning. Migration that favored large urban centers with high concentrations of employment and education is now leaning toward recreation, tourism, and open space. Materials and Labor Shortage Lumber prices shocked the real estate world in the spring of 2021. Now, steel prices are setting records and materials are in a rolling shortage. On the employment side, 23% of employees are expected to change jobs in 2022. Key people and key materials remain in short supply and working out supply logistics will take time. Capital Expansion Rising stock markets and rising real estate values coupled with direct capital infusion from federal government stimulus means there is more money than ever circulating in the economy. This expansion of capital is searching for investments. Unfortunately, every time capital is placed in the stock market or the real estate market, a seller has capital returned that needs to be re-invested. This is driving prices up and returns down. Interest Rates Both short-term and long-term interest rates will be determined by Fed policy. Expectations are that Fed stimulus will be withdrawn and short-term interest rate increases are imminent. If these actions slow the economy or impact employment gains in California, New York, or Illinois, expect the Fed to pump the brakes and resume more accommodative policies. Inflation Along the I-15 corridor, more demand, materials and labor shortages, more capital to invest, and low interest rates mean higher real estate prices in 2022. While the CPI hit 7% for December, housing measured only a 4% increase while home prices rose over 20% in most markets in 2021. Inflation is higher than reported. Affordability One of the most difficult real estate challenges is affordability. It is compounded by rising home prices and limited supply. Affordability can be improved by rising wages, falling home prices, or lowering interest rates. In 2022, wages, home values, and materials are all expected to rise. It is a challenging time for housing affordability. Conclusion While we won’t solve the affordability problem in 2022, we do know that over a lifetime, owning beats renting consistently. Long-term housing stability and closing the wealth gap in the United States both point to home ownership. For more information please visit https://erabrokers.com/research/ The last twelve months have seen sentiment in residential housing markets change dramatically. The result is one of the most dynamic and challenging housing markets in memory. Following is a brief overview of market conditions over the past twelve months and a look at what to expect in the second half of 2021. Summer 2020 The summer of 2020 ended the first wave of COVID-19 cases and with it came a sense that the pandemic might be easing. As individuals and families considered their housing circumstances, their employment, their school opportunities and their personal constraints, they looked to move. Early in the summer, supply was plentiful and buyer demand—although increasing—was not driving multiple offer scenarios. Rental eviction moratoriums were being enforced and mortgage forbearance was widely available. With interest rates at record lows, moving to a home that provided safety from the virus and accommodated work and school circumstances started the wave of home buying. Fall 2020 An accelerating wave of COVID-19 cases in the fall increased buyer activity as people sought refuge from the pandemic and policies that restricted movement. With relocations increasing, existing housing inventory began to fall. Buyers entered the market faster than sellers offered homes for sale setting up multiple offer. Builders, who just a few months ago were concerned about oversupply, found they had no inventory to sell. Many builders had released commitments in the spring and were now looking for lots, land, labor, and materials to ramp up their homebuilding operations. Interest rates remained near record lows and rents began to rise. Spring 2021 As COVID-19 cases fell from winter peaks and vaccinations rates rose, we experienced one of the most challenging markets for buyers ever recorded. What began as multiple offers turned into dozens of offers in many cases. The supply of available homes was measured in days, not months, and many builders moved to sell finished units only. Supply chain challenges and labor shortages became acute and seemingly everyone was following record high lumber prices. Builders renegotiated contracts and missed delivery deadlines. Sellers asked for tens and hundreds of thousands of dollars over ask and required buyers to waive due diligence and financing contingencies. Prospective sellers were unable to move because they couldn’t find a new home to move into, deepening the shortage and accelerating the price appreciation. Summer 2021 Moving into the summer, lumber prices began to stabilize and then fall. Existing home inventories increased, although inventories remain lower than during the summer of 2020. Price levels are much higher, although price increases seem to be stabilizing. Some sellers are asking too much for their homes, taking themselves out of the market. Appropriately priced homes are still seeing multiple offers, although far from the frenzy of the spring. The COVID-19 Delta variant began a third wave of rising case numbers since the pandemic began. Second Half 2021 Looking ahead to the fall and winter, we believe the same drivers are moving the market that we identified at the beginning of 2021. Home as a safe place is the number one priority for most home owners and renters. Individuals and families are still looking for a place to educate their children, work, and play while remaining safe from COVID-19. The increased flexibility of work arrangements are accelerating relocations. The recent increase in cases has some employers extending their work-from-home accommodations, which in turn has employees moving to the place where they want to live while keeping their job. Low interest rates are softening the impact of higher prices as monthly payments remain manageable for many individuals and families. While inventories are higher than the past spring, overall inventory remains far below historical levels and far from oversupply. What’s Ahead Inventory levels should increase, bringing them closer in line to historical levels. Supply constraints will continue to disrupt builders, but not at the same level as the past spring. Rental demand will remain high and rental units will remain under supplied, causing rents to continue to rise in most markets. Price levels are at risk if interest rates rise, remote employees are called back to the office, or builders get ahead of market demand. Given the current conditions, we expect prices to rise in the second half of 2021, although more slowly than in the first half of the year. For more information visit https://erabrokers.com/research/ One year ago, in March 2020, State and Local Governments put the United States into a recession in response to the global COVID-19 Pandemic. From the outset, it was apparent this recession would be unlike the past recession, or any other in our memory (see my post from March 19, 2020). It set in motion structural changes in our economy that will last decades. V, U, W, K Recovery As soon as the recession was declared, economists tried to describe the shape of the recovery. The first forecasts were for a sharp recession and a proportionally sharp recovery, a “V”. As COVID surged in a second wave during the summer, the concern became a long recovery and a long bottom, or a “U” shaped recovery. The improving economics in the fall lead to fears of a fall recovery and a winter retrenchment, followed by a more sustained recovery in the spring, or a “W” recovery. It is clear, that the COVID-19 recession will be something different, a “K”. A “K” shaped recovery is an economic cycle with a sharp downturn, followed by sectors that boom and others that bust. This bifurcated recovery is painful as some languish under frustratingly dismal conditions while others watch their economic outlook brighten. Value stocks languished in bear territory following the spring correction while Tech was responsible for the S&P reaching an all-time high at the end of the year. Big box retail saw tremendous pressure on sales while industrial distribution centers experienced record demand. Apartments in the densest urban cores are saw lease rates fall more than 20% while suburban and rural housing saw record high price levels. Tourism destinations such as New York City, Hawaii, and Las Vegas were hit very hard while destinations near national parks in states that did not close performed well. Restaurants with large dining rooms struggled to remain open while drive-thrus saw record sales. Non-essential employees who could not work from home became unemployed while essential and remote enabled roles remained employed and may have thrived. Unfortunately, K-12 education, one of the most resilient sectors in any recession, has not been spared the bifurcated outcomes. While budgets were hit with technology and curriculum modifications, the bigger impact was students who could continue to attend in person versus those who could not. Parents and students without means were disproportionately impacted by closed schools. With children at home, parents may have had to choose between essential jobs and their child’s education. Education is a means to opportunity, and many were set back by policies that kept children home without necessary technology, supervision, and support. Structural Population Shift Since the Industrial Revolution, people have migrated to cities for education and employment. While the country was historically dominated by small farms and agricultural jobs, the industrial revolution resulted in technology and productivity gains that transformed farming and created opportunity in nearly every other industry. The result was generations of better jobs and upward mobility concentrated in urban centers. These urban centers have housed the nation’s largest employers and attracted talent from across the country. In many instances, employers are there because they were looking for a deep pool of human capital and the infrastructure to support their growth. Over decades, state and local governments set policy with the knowledge that employees would be required to work where their employers were headquartered. While technology was enabling remote work and remote education for a few prior to the pandemic, COVID-19 may have broken this relationship between employer and geography by allowing millions of jobs to move remote nearly overnight. Live, work, play is a movement that has been upended by COVID-19 and the structural shifts in its wake. It used to be that we lived where we worked. Now, many may have the opportunity to live anywhere. If they have that choice, will they choose to live where they play? Will they relocate to be near family? Will they choose to live in expensive urban centers? We have already seen that many are willing to relocate if their employer will allow them. This is a potential reversal of a migration trend that could favor most communities in the country with only the largest, most expensive, most dense urban centers impacted. It is a reversal that could change population and demographic trends for generations to come. Interest Rates What happens when interest rates are not set by market forces, but rather managed by policy? Jerome Powell, chair of the Federal Reserve, and Janet Yellen, immediate past chair of the Federal Reserve and current Secretary of the Treasury, have stated that they do not want to see interest rates rise. An increase in interest rates would make government borrowing more expensive. What are the impacts of a managed low interest rate environment? First, is the intended boost to consumption and investment. Because interest rates are low consumers and investors are incentivized to spend more. Housing is a good example. A 1% decrease in interest rates on a $350,000 home will allow the price to rise approximately 14% while the mortgage payment remains the same. In other words, the payment on a $350,000 house at 4% is approximately the same as the payment on a $400,000 house at 3%.  There is downside. First, if you are looking to earn a return on savings, you will be disappointed. This incentivizes savers to take additional risk and compete for other investments like stocks, bonds, and real estate—driving those assets values up. Second, the distortion makes government borrowing for federal, state, and local governments appear lower than it should be, incentivizing borrowing by government.
When interest rates become more about policy decisions than economics, unexpected distortions occur that are not healthy in the long run. Policy Distortions More than ever, economics is valuable in helping understand the result of policy choices. It is important to listen to what policy makers say, but it is even more important to watch what they do. Policy makers have often said they want to help individuals who have been hurt by the COVID-19 induced recession. More than once, they have issued checks of $1,400 to qualifying individuals. They have provided rental assistance and eviction restrictions. At the same time, interest rate policy has increased home values on average by $50,000 in the United States. This disparate impact has benefited homeowners and widened the wealth gap relative to those who rent. Policy makers have said the want to put money in families’ pockets to help them weather the pandemic. The combined relief packages of over $5.2 trillion in COVID-19 stimulus in the United States distributed to over 130 million households would have been $40,000 per household if distributed directly. If relief focused only on those who lost jobs during 2020, the combined relief packages for approximately 25 million lost jobs is $208,000 per lost job. Policy makers are concerned about large urban cities and their recovery. Structural shifts accelerating work from home options have released many from living in urban areas, and they have responded by moving to less crowded areas. The result is less traffic, less crime, better air, and better balance for relocating employees. The downside is less revenue to support urban infrastructure and programs. Policy makers have said they are concerned about getting Americans back to work. Many will stay out of the work force by no choice of their own until economies are open and policy makers trust citizens to make good decisions. Policy makers are concerned about equal opportunity for all Americans. There is no greater equalizer than education, yet in many communities our schools remain closed and those students who are least prepared to catch up are being impacted the most. Conclusion Unfortunately, as with most recessions, individuals are impacted differently. This recession is unique in that winners and losers are primarily determined by policy, not by economics. The response has been to stimulate the economy by lowering interest rates and fiscal spending of $5.2 trillion. Homeowners, suburban and rural communities, and essential services are winners that are benefiting from the upside in a “K” shaped recovery. Urban centers, renters, children, and low wage earners are feeling the downside. The policies of the last year are highly inflationary, even if inflation doesn’t show up in traditional consumption items such as food, fuel, or other household purchases. Asset prices are rising and will do so until the policy induced stimulus runs out.  Reduce Your Tax Liability, Buy Commercial Real Estate
If you have had strong income or expect to have a significant taxable income this year, investing in real estate may help. You can either pay the IRS, or do something they have incentivized you to do that allows you to keep your hard earned income. It is not unusual for the tax code to use taxes to incentivize certain types of investment. For example, if you make financial contributions to a qualified retirement accounts, those contributions are deductible and reduce your overall taxable income, which reduces the amount of taxes owed in the year you make the investment. Depreciation Benefits for Real Estate Real estate assets differ from financial assets like stocks in that a portion of real estate gets consumed with time and is replaced. A real estate asset is part indestructible asset (the land) and part consumed asset (the improvements). Tax law recognizes improvements are consumed by allowing investors to depreciate the improvements but not the land. Depreciation is the reduction in value over time for the normal wear and tear of an asset. The amount of depreciation allowed is determined by a schedule provided by the IRS. It has been known for many years that the IRS will allow a cost segregation study on real estate assets. This study is prepared by a professional who evaluates the real estate based on the property type, age, and nature of the improvements. Instead of being depreciated over 39.5 years, a cost segregation study separates the property into 5 year, 15 year, and 39.5 year improvements. For example, 15 year improvements are those improvements that have to be replaced in approximately 15 years because their useful life has been exceeded. This may include tenant improvements, the roof, or the HVAC system. Segregating improvements into their respective 5, 15, and 39.5 year useful lives provides larger deductions in earlier years relative to a standard 39.5 year depreciation schedule. Given that depreciation reduces taxable income and assuming that depreciation today is more valuable than depreciation in the future, accelerated depreciation is valuable. 2017 Tax Law Allows for Accelerated Depreciation President Trump’s tax law, Tax Cuts and Jobs Act, passed in 2017 made a substantial change to depreciation that benefits commercial real estate owners. It allows for 5 and 15 year property designated in a cost segregation study to be fully depreciated in the year the property is put in service. That means that if you purchase and put in use a property in 2020 and the property has $500,000 in 5 and 15 year improvements, then the owner could deduct up to $500,000 in depreciation in 2020. Also significantly, the tax law in certain cases authorizes you to use the depreciation benefits to offset prior year income. You need to discuss this with your tax professional to determine if you qualify for this treatment. Exhibit 1 shows a hypothetical $1,750,000 investment purchase where the value is allocated to land ($437,500), 39.5 year improvements ($812,500), and 5-15 year property ($500,000). In year 1, without cost segregation and accelerated depreciation, the straight line benefit on the 5 and 15 year property is $50,000 * 35% (the hypothetical tax rate), or $17,500. Under the 2017 tax law, additional depreciation benefits in Year 1 are $450,000, which at a 35% tax rate are worth $157,500. This means that in the year this hypothetical property is put into use, buying the property could save the investor $157,500 in income tax expense—or 9% of the property value. There is always a catch. Accelerating depreciation reduces your basis in the property so that when it is time to sell, your gain is larger than if you had not accelerated the depreciation. That means your tax liability is larger when you sell in the future. Of course, you can exchange the property and defer the tax liability even further by utilizing a 1031 exchange. What About Investors? The best benefits are for property owners, but investors can accelerate depreciation to offset up to 100% of the future income generated from the project. As always, please consult your tax professional to determine how the new tax law applies to you. Conclusion There are may investment opportunities available to investors. All of them have their respective benefits. Financial assets like stocks, bonds, and mutual funds can be held in tax deferred accounts that allow for investments to accumulate while deferring tax liability. Benefits to owning real estate include the ability to depreciate the consumable portion of the asset over its useful life. The depreciation benefits are set by the IRS and were revised in the 2017 Tax Cuts and Jobs Act. The revision resulted in the ability to accelerate depreciation and reduce taxable income today. This can be a valuable benefit for investors looking to offset taxable income from real estate investments.   Working out Leases and Loans
The speed at which the economy stopped in 2020 put tremendous strain on landlord and tenant relationships. The Government’s actions to intentionally stop the economy to slow the spread of COVID 19 have closed or otherwise harmed many successful businesses. Tenants and landlords are both at risk from the economic impact. Property owners and lenders may feel similar tension. This discussion can be applied in both contexts, landlord/tenant and lender/owner. Landlords and tenants may seem to be at odds, but their interests are more aligned than is readily apparent. When a landlord receives notice of a tenant in distress, at least six options can be considered:
We recommend evaluating each situation and identifying the best solution based on the unique circumstances. Recognize that with any of these options there are laws and contracts in place that may impact the decision making process. The context for discussing these options is commercial real estate, but the principles can be applied to residential scenarios with appropriate deference to applicable law and regulation. Option 1: Do Nothing If a tenant requests relief, the landlord is not obligated to grant the relief. Although there may be legitimate reasons for the tenant’s distress, the landlord is not operating the tenant’s business and is not obligated participate in the downside. The tenant isn’t paying additional rent when it is business is exceptionally good, why should the landlord reduce the rent when the tenant’s business is exceptionally bad? Landlords may offer many reasons for not participating. Any of them may be legitimate from the landlord’s standpoint. One of the most common reasons to say no a request is to simply postpone making a decision. By not agreeing, the landlord preserves the option to make a decision later according to the terms of the lease agreement. Tenants are not helpless in this situation. They have the option of simply not paying and forcing the landlord to enforce the terms of the lease or come to the negotiating table. Option 2: Waive All or Partial Rent If Option 1 is extraordinarily landlord friendly, Option 2 is extraordinarily tenant friendly. If a tenant requests relief, the landlord may grant it. From the landlord’s perspective, it may be much less expensive to waive rent than have the property go vacant, pay leasing commissions and tenant improvements to accommodate a new tenant. In a commercial application, vacancy, leasing fees, concessions, and tenant improvements can easily cost six months of rental income. In a residential context, vacancy and turnover cost may equal one or two months rent. A landlord may determine working with an existing tenant may be less expensive than finding a new one. Tenants who make a request to waive rent should be understanding of the landlord’s situation. The building owner will also have expenses and obligations to meet and asking for a waiver of rent may create a hardship for the landlord. Tenants should understand that concessions granted by the landlord are not free to offer. Option 3: Extend the Lease Term The end of the lease agreement may present a negotiation. Sometimes the tenant willingly vacates. Sometimes the landlord choses not to offer an extension to the tenant. Frequently, the landlord prefers for the tenant to remain in place. In these cases, a temporary lease accommodation, such as a period of free rent, may be acceptable to a landlord in exchange for an extension of the lease. The lease extension could be for the amount of time the lease was waived, or for any other agreed upon period of time, longer or shorter. Negotiating for a longer term would be most common. On the other hand, a landlord who wants to change tenants might negotiate to shorten the term of the lease. Tenants should recognize that the larger the concession, the more the landlord will expect. Modifying lease terms to be longer (or shorter) may be worth the short-term financial flexibility needed. Option 4: Make Up Payments Over Time A tenant who needs short term relief may be able to make up the rent payment over time. It could be deferred for a short period of time, or it could be spread over all future lease payments—possibly with interest. This is referred to as capitalizing the rent. In this way, the tenant receives the accommodation requested and the landlord receives the rent earned—possibly with interest for having the payment postponed. While the timing is different than originally agreed in the lease, it is a solution that can be effective for both parties. Tenants who have a good business and who will legitimately be back in business soon expect to be able to pay a little more in the future and should be prepared to make the landlord whole over time. Option 5: Use the Security Deposit Many lease agreements have a security deposit. It is common for that deposit to be one or two months rent. A tenant who has a security deposit in place may ask the landlord to accept the security deposit in lieu of making a rent payment. This ensures the landlord has the lease income needed and the tenant can skip a payment to support their business. Tenants should understand that they will not receive their security deposit back at the end of the lease term. Further, they should be considerate of the way the space is returned to the landlord so that the landlord is not penalized for having forgone the security deposit at the tenant’s request. Option 6: Improve the Credit Quality A tenant may not have signed a corporate or personal guarantee. The tenant may have not pledged any collateral at the time of lease signing. Generally, landlords prefer stronger credit tenants to weak ones. With this assumption, a request from a tenant accompanied by an improvement in the credit may be favorably received by a landlord. Tenants often negotiate to minimize long-term credit exposure. A tenant who wants the landlord to support its long term business opportunity can lower the risk of default to the landlord. A request to waive rent and simultaneously reduce tenant credit exposure could be seen as a sign of a tenant’s weakness and incentivize the landlord to find another tenant to lease the space. Conclusion There are many options available to both landlords and tenants facing difficult times. Any of the solutions could be appropriate depending on the circumstances. In considering these options, it is important to make sure than any adjustment is compliant with agreed upon covenants and in accordance with government regulations and directives, which differ for residential versus commercial property. Finally, it is critically important that whatever decision is made, document the revised terms in writing signed by the parties as an amendment to the agreement. Landlords and tenants can obtain better results as they work together. NAI Excel, NAI Vegas, and its affiliates manage over $350 million in real estate assets from Salt Lake to Las Vegas and are available to assist in managing Landlord and Tenant relations.  The United States government struggled with the COVID-19 recovery bill to address the recession the government created. It will not be implemented but here is my proposal (skip to #5 below if you are in a hurry).
1) The bill that is being considered is enormous and highly inefficient. It will get passed anyway. 2) We should not subsidize state and local governments. They made the decision to go into recession, their revenues are protected (utilities, property taxes, income taxes). Sales tax has exposure, but it has always been more volatile than income and property taxes. 3) We should not subsidize businesses or industries. Their assets will be bought and the human capital will not be destroyed. Let the situation play out with investors and creditors. 4) We should not try and solve the situation through unemployment insurance. It is too bureaucratic. The money will not get distributed when it is needed, and then too much will get distributed when it is not needed. 5) There are approximately 130 million households in the United States. Congress will approve an astounding $2 trillion dollar package. That is $15,000 per household. Why not send every household $15,000? The IRS can claw back unneeded funds on next year’s tax return for those who do not lose their job and who make over $100,000 per year. If someone loses their job or does not make over $100,000 per year, then let them keep the money. We are a consumption based economy. The business sector will weather the recession if consumers are not scared and broke. The payments will allow everyone to either get through the next couple of months or have some reserves set aside. Those who don’t end up needing it can return it on the next tax return. The rest of the country will be set to deal with the recession the government created. This solution can be executed fast, it is easy to implement, and easy to administer.
We are in Recession The United States moved into recession because of COVID-19 and subsequent governmental actions. It hasn't been confirmed by official statistics, that will take time. A recession is defined as two consecutive quarters of falling Gross Domestic Product (GDP). The first quarter of 2020 will show a small drop in GDP because of COVID-19 personal distancing measures and impacts to nonessential business implemented by governments in March. The second quarter will be a much larger drop due to the impacts. Which Sectors Will Be Hurt the Worst? High exposure sectors include hospitality, travel, tourism, restaurants, airlines, and other businesses that put groups of people in close contact. The personal distancing measures governments have implemented will create residual reluctance for people to be in large groups and will slow recovery for some businesses. Further, any business or activities considered nonessential will be slower to rebound. Who are the Winners? First, winning in a recession is relative. Some will see revenues rise, but some may simply see revenues not fall as much as harder hit sectors. Delivery services will do well, online merchants will benefit. Personal services offered in homes will benefit. Healthcare, domestic manufacturing, transportation, housing, internet and communications services, and utilities considered essential will be more resilient and some will see upside. Not the Same as Last Time Each recession and recovery is different. The last recession was characterized by a surplus of homes built by home builders and inflated buyer demand from real estate investors buying homes no one planned to live in. It was made possible by the underwriting of loans where borrowers didn't have sufficient income to support the debt service. Contrast this with current real estate markets. First, home builders have built many homes, but in some cases at half the rate of the last market cycle. There is very little standing inventory, and the homes have been purchased by people who will occupy them, or investors with someone to rent them. Further, when the loans were originated, the investors who purchased the homes had the income to support the investments. This recession was initiated by COVID-19 being declared a global pandemic and the actions of governments to implement personal distancing and close nonessential businesses. The government knowingly put the United States in recession in an effort to stop a global pandemic. There will be softness in real estate. New home construction will be impacted more than residential resale. Expensive markets will be impacted more than affordable markets. Low growth markets will be impacted more than high growth markets. Retail will be impacted more than industrial. Hospitality and vacation rentals have the most exposure today. Interest rates will be low and there will be opportunities for buyers. Recovery The economy will adapt and recover. This recovery will be much quicker than the last one, but it still will take time. Unemployment will rise quickly and the hiring will be slow to recover because of an abundance of caution from employers. Recovery will begin when collective economic activity stops falling and starts growing again. The start of the recovery is not intuitive. It is when everything seems to be the worst. We call this the trough. The recovery lasts until we reach the peak of the last market cycle, which will be the fourth quarter of 2019. From there, we will resume economic expansion. Looking Ahead Everyone will adapt. Some adjustments will be easy, some will be hard. Individuals and businesses will make adjustments and we will begin a recovery. Some basic principles will persist. First, have cash set aside for a rainy day. Second, you can't get credit when you need it most. Secure credit when times are good. Third, change is inevitable. We can't always predict the source of change, but we can adapt and be responsive to change. Our world changed in the matter of a few months. The more quickly we make adjustments, the quicker we will begin the process of recovering. 
Market research is an important aspect of real estate. In preparing for our Commercial Real Estate Outlook and Residential Review, we took additional time and space to outline fundamental demographic trends that will shape the intermountain region. Some highlights:
We are excited about the long term fundamentals of our markets. Over the next five years, population from Las Vegas to Salt Lake is projected to expand by approximately 350,000 people according to Utah and Nevada official estimates. That expansion will require 125,000 housing units. The corresponding commercial real estate expansion of Industrial, Office, and Retail is estimated to be 50-60 million square feet to accommodate the same population increase. This does not include schools, universities, hospitals, hospitality, and other special use assets. The following five years from 2026-2030 are projected to grow by nearly that amount again reaching to 600,000 new people. To view the reports see below. Download the 2020 NAI Excel | NAI Vegas Decade in Review here: https://excelcres.com/market-research/ Download the 2020 ERA Brokers Consolidated Residential Review here: https://erabrokers.com/research/  Many have proclaimed their disapproval over elections outcomes. Some have suggested foul play because their candidate isn't automatically declared the winner. Some have labeled elections processes undemocratic. In a few instances, unsatisfied individuals propose a referendum or ballot initiative to change election rules.
We are in need of a civics lesson. Our nation is not a democracy. It is a republic. If there is any doubt, look at the Constitution. Electors, consisting of a body equal in number and representation to the sum of the House of Representatives and the Senate, choose the President. In the event they cannot come to a majority, the House of Representatives makes the final determination. Originally, senators were chosen by state legislatures, not the broader public. In 1789, only the House of Representatives was elected by popular vote. Today, because of the 17th amendment, the Senate is also elected by popular vote. Some advocate the wrong process for solving perceived elections problems. For example, Consider the discussion regarding the presidential election outcome where the popular vote and the electoral college produced different results. The United States can't change the process for electing the President from Electors to the winner of the popular vote by ballot initiative or legislation. It requires amending the Constitution. A republic is fundamentally different from a democracy. In a democracy, voters take action or legislate through ballot initiatives and referenda. The majority rules--right or wrong with little consideration for the minority. Further, referenda are passed with no process for ammendment or improvement. In a republic, voters select representatives that govern according to a charter (or constitution) and these representatives act on behalf of voters in a deliberative process of legislation and negotiation. Voters may re-elect them or give the office to another. Most of the time, those who substitute "democracy" for "republic" are making an unintended error. Similarly, the term "democracy" and Democrat are no more linked than "republic" and Republican. The respective parties may have opposing views on many issues, but both support our representative form of government. Politics has always been contentious. Emotions run high when supporting candidates or debating interests and principles that individuals feel strongly about. Disagreements are common when parties seek to persuade detractors and reassure supporters. Contention over policy or an unfavorable election outcome is a poor justification for changing the process. The effectiveness of the representative process is grounded in the necessity of assembling a majority while protecting the interests of the minority. Today, many argue there is too little accomplished by the Congress or the President. Their respective stalemates and corresponding contention are frustrating. To them, I argue that this was an intentional design of the founders to ensure that a majority in one body can't ignore the interests of others. If there is an inability to achieve consensus among a majority in Congress or among branches of government, we ought to take time to work through the issues. Some issues will move too slowly to appease advocates, but governance is a process of persuasion. By definition it is slow, you don't get everything you want, and there are opposing views trying to stop your efforts. Understanding the process is an important part of participation. Citizens understand what it means to vote, but frequently misunderstand the process and misinterpret the outcomes. We must do a better job educating voters and their children about our elections and legislative processes if we want better voter participation with less contention in the future.  As a new public charter school authorized for 8-12th grades opening in August of this year, St. George Academy will help benefit all of the students in Southern Utah. Michael Dee Martineau titled his 2013 Department of Economics PhD dissertation at the University of Utah “The Competitive Effects of Charter Schools in Utah.” In his paper, he concluded “districts that have seen a greater degree of charter competition tend to see increases in traditional public school achievement”.
St. George Academy is designed to be an educational experience with the goal of better preparing students for college and the rest of their life. The Salt Lake Tribune published an article on March 5, 2017 titled “Struggling Students Forced to Wait as Utah’s Public Colleges Don’t Have Enough Therapists”. Therapists for what, you might ask? Anxiety, stress, higher expectations, or unsettling news according to the article. Our students need to be better prepared for life after high school graduation. Students also need to be better prepared academically. Universities and colleges work with a large number of students who are not ready for their freshman classes. This problem manifests itself in two ways, students who start college but do not finish, and students who are required to pay for and take developmental courses before continuing with their education. The time and expense to students, colleges, and universities on individuals who are not graduating is concerning. In public education, some have pitted local districts against charters. This is the wrong focus. There should be one focus. Students. I currently have children enrolled at both charter schools and district schools. Our children attend their respective schools not because of the kind of school they are, but rather for the educational experience they offer. As much as anything the public sector does, education is the most impactful in our community. Every other aspect of well-functioning societies are positively impacted by a better educated population. Some argue our educational institutions are failing. I say let’s improve. Some say they are underfunded. I say let’s work with what we have. Others argue the best educators are leaving the industry. I say let’s prove them wrong. We don’t offer education to a community, a school, a grade, or even a class. Education is a personal experience. It is offered to each individual. While students may sit in a class together, each student has the opportunity to choose to learn. Let’s improve by trying to create an environment where more students want to learn. Let’s rise above the funding constraints by demonstrating creativity and problem solving skills. Let’s demonstrate that education is more than bricks and mortar, programs and features. Education is a resourceful teacher inspiring students to learn. St. George Academy will benefit the students walking through the doors, but it will do more. Our students, parents, faculty, and community members desire to be part of the solution in their own lives, and hopefully realize the conclusion asserted in Mr. Martineau’s paper, “a greater degree of school choice in Utah can indeed be a rising tide that lifts all boats.” You can read the full dissertation here: https://collections.lib.utah.edu/details?id=195861  While the rest of the United States and the Wasatch Front have seen multi‐family development
recover, expand, and peak, Washington County has failed to build a single unit of market rate multi‐family housing in a configuration over 20 units as of this writing. Even with rising rents and record low vacancies, development lags. This analysis considers the reasons for sluggish developer demand and proposes solutions to ensuring there are more affordable housing options in the St. George area in the future. I reviewed over 30 charter school bond issues for schools located in Utah. The process involved reading the offering statements and aggregating information about the school, the key service providers, interest rates, and key economic terms. For easy reference, I've assembled the data into two tables and used the data to create charts showing key relationships related to interest rates. Larger schools and schools with better credit ratings clearly have a financing advantage relative to smaller, lower credit quality schools. Further, they have lower relative issuance costs.  The State of Utah has tens of billions of dollars (yes, more than $10,000,000,000) in cash and short-term investments for liquidity, float, reserves, and savings. The strategy for managing this money is very important. Even a 0.1% increase in investment returns generates $10 million (yes, $10,000,000) in additional dividends to be distributed to entities of the State. This analysis proposes increasing dividends for entities like municipalities, school districts, charter schools, water conservancy districts, and universities by altering the available investment options. Without increasing credit risk or raising taxes, we can distribute additional funds to government entities. While as an economist, I have to acknowledge there is no such thing as a free lunch, this is just about the closest thing to it. All students are not considered equal, according to this analysis of state support for institutions of Higher Education in Utah. When it comes to capital facilities and annual appropriations, the results indicate that students at the University of Utah and Utah State University receive significantly more support from the Utah State Legislature than the other institutions of higher education. While some underfunded institutions are catching up, others are falling further behind. Some of the discrepancies are justified while others may require a second look. Also, for an expanded look at state facilities spending, view this blog post from earlier this year: http://rneilwalter.weebly.com/home/state-funded-buildings-are-not-free
Charter schools are public schools. State owned facilities, including charter schools, do not pay property taxes. Facilities leased by the state or one of its subdivisions do have to pay property taxes. Many states have exemptions for state facility leases, which would include schools, but Utah currently does not. This is especially problematic for charter schools that are built by a developer as a stand-alone facility. Charter schools leasing one of these new facilities must bear the added burden of paying tens or hundreds of thousands of dollars in property tax expense. Many schools have dreamed of having a waiver. While there is no waiver, the summary below describes how schools may be able to take advantage of the property tax exemption by structuring their transaction appropriately. You can preview the overview below or download the document as a PDF here.  The State of Utah and more particularly the Republican Party have been in the throws of a knock-down, drag-out fight over the nomination process for candidates. Count My Vote initiated a movement to replace party conventions with primaries. The movement spawned Senate Bill 54 which allowed candidates to choose between collecting signatures with the option to bypass the party convention and still appear on the primary ballot or securing enough votes at the party convention as a requirement to appear on the primary ballot.
Count My Vote proponents want to increase voter participation, represent the voice of the people, and eliminate party control of the ballot. These are all positive outcomes that resonate with many in our State. Some have been confused or frustrated by the Republican Party's challenge of SB54 and County My Vote. They see the party's fight as evidence that it wants less voter participation, less representation of the people's voice, and control of the ballot. The real debate is not over the desired outcomes, but rather the process to achieve those outcomes. The Republican Party also wants more voter participation, to be representative, and for Republicans to choose their candidates with party officials acting as independent referees. Process and rules are important. They can be boring. They may often seem irrelevant, but they are what creates a level playing field for the party's number one responsibility--candidate nomination and election. Process and rules make the elections and governance inclusive for both urban and rural areas. For a clear illustration of the importance of process, look at the current Republican Presidential nomination. As of today, it appears Donald Trump will not secure a majority of the delegates at the Republican Convention in Cleveland. So why not just make him the nominee because he has the most support (but not a majority)? Delegates to the Republican National Convention are not allocated simply by popular vote. To do so would render rural areas irrelevant. It was for this reason the Founders compromised in the establishment of Congress with two chambers inclusive of the Senate (equal representation regardless of population) and a House of Representatives (representation by population). Similarly, while we watch the popular vote for President in the general election, we count based on the Constitution's process for electing a president embodied in the Electoral College. To simply count the popular votes would disenfranchise the small population states and marginalize the compromise represented in our Constitution. George Will with the Washington Post explained the importance of the Convention in establishing a level playing field for presidential candidates and getting to a majority support as opposed to nominating a candidate without a majority. http://www.sltrib.com/opinion/3795372-155/will-the-gift-of-trumps-ramshackle In an editorial authored by seven prior National Chairmen of the Republican National Committee published April 21, 2016 in the Wall Street Journal, they made a parallel argument. http://www.wsj.com/articles/lets-get-this-straight-about-the-convention-1461193740 (subscription required). Imagine if the Speaker of the House suggested that it would pass a law that had more support than any other version of the law, but could not secure a majority vote on the House floor. We would be outraged--49% is not the same as 51%. Even 50.0% is not a majority whereas 50.1% is. Resolving pluralities (support from most, but not a majority) is a thorny problem in elections and legislative processes. We do not recognize pluralities as the will of the people. There is simply a stalemate until a majority can be reached. Resolving pluralities (without a majority) requires an effective process. It is for this reason that the Republican National Convention all of a sudden becomes not only relevant, but necessary. Without the convention, we have a plurality with no way to get to a majority. For the same reasons, state and county conventions are also relevant and necessary. If there are problems with the process used in the conventions, we should change those processes, not circumvent the convention. The reason the Utah Republican Party has fought so aggressively against SB54 is to preserve the convention and its ability to break plurality stalemates and come to a majority behind a nominee. I am confident that as a party and as Utahans, we will work through the disagreement over the elections process and come to a positive solution because we share the same desire to increase voter participation, have a representative process, and let voters decide who is on the ballot.  Capital Expenditures are a unique challenge in state budgets because subdivisions of the state are rarely charged for using the state’s debt or equity for facilities, equipment, and other investment needs. In an effort to take advantage of the current resource allocation process, state subdivisions lobby for capital expenditure appropriations. The result is an inefficient distribution of resources for capital expenditures within state budgets where the most connected, best funded lobbying efforts frequently win. This paper proposes changing the capital resource allocation processes by attaching a cost to state appropriated capital expenditures in an effort to increase accountability and efficiency while improving the long term credit strength of the state. 
The US Forest Service today is not the Forest Service our parents and grandparents knew. Below is a Dixie National Forrest map from 1962. The text is more interesting than the map. The first line reads "You, as a citizen of the United States, are joint owner of this mountainous area". It goes on to highlight the recreation, private resorts, wildlife, timber, forage, and energy development in the area. Some quotes from the Forest Service map:
The multiple use philosophy embraced by the forest service in 1962 in no way resembles the forest service management philosophies of today. Unfortunately, many of the policies limit access, reduce recreation opportunities, and eliminate economic activities. If you want a PDF copy of this map, email me at rneilwalter@gmail.com. In my last 12 months at ConocoPhillips, we did some significant work on quantifying the process and impact of trade entry errors. It was surprising to see how data entry errors could drive metrics like Value at Risk and P&L. I hadn't thought about this for a long time, but I was going through my desk last night and found my notes from when I presented at Energy Risk, the premier energy risk management conference held annually in Houston, Tx. I co-authored the paper published in the Global Association of Risk Professionals (GARP) magazine below with Kevin Kindall and Xianqiao Chen. We wrote a pretty good paper. What was better, was I had built a model to analyze the daily mark-to-market P&L by business unit or for the entire trade floor. It gave us the ability to see daily profit and loss changes grouped by price changes, new transactions, and data entry errors. I don't have PDF copy of that model. I'll have to scan the one that is in my folder.
 Public lands issues are becoming a polarizing issue once again in the State of Utah. Currently, the Attorney General is pursuing a lawsuit to have federal lands transferred to State control, and the American Lands Council is building support from other western states who agree that federal land control in the West is overreaching. Opponents suggest attempting to change the status quo is a waste of money and will result in developers ruining the beauty and accessibility of the American West.
It is helpful to view public lands through a different lens prior to choosing a side in this debate. I found a Dixie National Forest map published by the Department of Agriculture with 1962 dates on it. It starts with an introduction to the June 12, 1960 Multiple-Use and Sustained-Yield law which directs that “the renewable surface resources of the National Forests be developed and administered on a multiple-use and sustained-yield basis…National Forest resources include recreation, forage, timber, water, and wildlife.” It goes on to say that “sustained yield means perpetuating a high-level annual or periodic output of the various renewable resources.” In the early 1960’s, Dixie National Forest forage crop was harvested by 20,000 cattle and 37,000 sheep and the annual growth and harvest of timber was 29 million board feet—enough to build about 2,500 homes. Those calling state control and who simultaneously object to current federal land management policies recognize that there is a difference between the multiple use and sustained basis of the past, and the conservation only mindset of today. Why does the change in position matter? In Utah, significant education funding comes from property taxes. Because the Federal Government owns 62% of Utah and is exempt from property taxes, Utah’s ability to fund education is impaired relative to states with little or no federal ownership. When 20,000 head of cattle were foraging on Dixie National Forest land, it was less expensive to raise cattle. Higher beef prices are partially the result of fewer annual grazing permits on federal lands. Similarly, beetles devastated millions of acres of Utah forest while we imported lumber from Canada. Much of the timber was not harvested because of difficulty obtaining permits on federal land. Further, recreation opportunities are diminished when motorized vehicle restrictions close roads and restrict access to the young, the elderly, and the disabled. Last, and equally frustrating, on September 22nd the Salt Lake Tribune reported the conflicts between the BLM’s Special Agent in Charge and rural county Sheriffs. According to the Tribune, the Sheriffs say, “his intimidating attitude and unwillingness to consult with counties exemplify a ‘culture of arrogance’ that undermines cooperation in Utah’s remote reaches. The public loses, safety is compromised, and tax dollars are wasted.” Public lands will continue to be a polarizing issue. Everyone agrees that the lands should not be exploited, but a conservation only mindset today sacrifices education funding, increases commodity prices, and results in frayed relationships between locals and federal administrators. It is in this context that the Republican Party and its elected officials are pursuing multiple strategies to bring the administration of public lands closer to home. There is no desire to ruin national parks or pollute pristine vistas. The objective is to return to a more balanced approach consistent with the “multiple use and sustained yield basis” that allows all of our citizens to be simultaneous beneficiaries of our vast public lands resources. This article was originally published in The Spectrum as a guest editorial on 9/27/2014. For more information about the economics of a potential lands transfer, please see the study published by a collaborative effort between three state universities: the University of Utah, Bureau of Economic and Business Research; Utah State University; and Weber State University published here: http://bebr.business.utah.edu/page/transfer-federal-lands-state-utah  Charter Schools are a positive development for public education in the United States. According to the US Department of Education in 2013, there are nearly 6,000 charter schools nation wide serving over 2,000,000 students. The majority of net enrollment growth across the United States is being absorbed by public charter schools. This represents a tremendous facilities expansion. Most schools are governed by a board of directors made up of parents and community members. With the large number of new charter schools being authorized each year, I felt it was important to provide a guide to negotiating and navigating the charter school facility decision making processes. Below is a free copy of Charter School Facility Finance: A Resource for Boards and Administrators.
Some of the topics include:
 When purchasing a home, borrowers are frequently asked if they would like to have the lender pay the origination fee or other closing costs by increasing the mortgage amount. Similarly, borrowers may be asked if they want to pay additional money to buy the interest rate down. This overview shows why most of the time, neither is the best choice.
To read the full whitepaper, click here: Bank Financing at Closing Most people think that the lender is charging them the same rate to finance closing costs that they charge for the home loan. In reality, mortgage lenders may be charging as much as 18% interest on the funds used to pay closing costs. Borrowers can do much better simply by asking the Seller to pay the closing costs--then the lender doesn't charge a different interest rate on funds used to pay for things like origination fees, lender policy of title insurance, appraisal, and inspection fees. Similarly, most borrowers who are considering buying down their interest rate should plan on staying in the property without refinancing for at least 10 years. Borrowers who refinance or sell prior to 10 years typically are making money for the lender. If you stay in the loan the full 30 years, you may get a great deal--but you have to stay the entire period of time. Looking to determine if you should use lender paid closing costs or buy down your interest rate? Here is an calculator in Microsoft Excel that can help. Closing Cost and Buy Down Calculator. Neil |
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