April 2008 – The Way We Were

Sure, a gallon of gasoline at almost $4.00 a gallon seems painful, particularly in my case since I drive a vintage Mercedes Benz 300 Diesel.  Indeed, a gallon of this less processed fuel is $4.25.

Economic times are tough, for sure, for those in the residential/condo market.  The office market on the other hand, is strong and robust.  A recent report tells us that South Florida has the second lowest vacancy rate in the US for suburban offices.

So, how bad are things?  At this stage of life, there is much room for growth for me, I’m at this is fourth or fifth “adjustment” or “correction” or “downturn” experienced.  (Notice I did not use the “R” word).  All of these periods ran their course, and the passage of time will cure almost anything.  The US economy is strong in most sectors, except residential real estate and financing, and if the dollar strengthens, our balance of payment improves and we , tone down the cost of the war in Iraq and Afghanistan, the recovery will occur that much faster.

How do these times compare to the past?  When I was in college and law school, gas was $.39/gallon.  I had a Studebaker auto that got 22 to 24 miles per gallon.  A dollar, maybe two for gas in the tank on Friday night would get me on two dates and a trip to the beach on Sunday.  Since I worked as a construction worker on the road crew at Levittown, Long Island, it would also get me to work and back the rest of the week.

On the road crew, we worked a six day week, 10 hours a day for $1.25 per hour, straight time, no unions.  A new two bedroom, one bath house with an unfinished dormer or attic, sold for $6,880!  No garage, two concrete ribbons to park your car.  The big sales gimmick was a six inch television set installed in the panels covering the staircase to the second floor.

Bill Levitt sold hundreds of houses, as fast as he could put them up.  Over the three summers I worked there, we poured sidewalks for over 2,500 houses.  Remember this was post World War II, the late forties and early fifties.  A ten year depression and a five year war for the US, had starved consumers.  There was a long period to catch up.  The first “correction” occurred in the mid-fifties, a mild one, and a more serious downturn in the mid sixties.  After that, every seven to eight years we have had a recession (there I used the “R” word).  This time we have had a longer period of growth than usual , fueled by easy and cheap money, modest inflation and the advance of a global economy, especially in China and India.

So, the way we were is a function of how many times we commit the same dumb mistakes or subprime mortgages (forgetting loan to value standards and credit underwriting), create structured investment vehicles (SIV’s), that contain a pool of mortgages that are presented as a bond, given a credit rating by a rating agency that has no idea what they are doing.  Sure, it hurts but time will correct the ills and we will swing back to a period of growth.  This time however, we need to really start to change our dependence on foreign oil and fossil fuels.  Tell me though, has your life style really changed because you are paying $4.00 a gallon for gas?


by Steve Magenheimer