doing without certain activities

Since September 11, Americans have discovered they can get along without many activities they formerly carried out regularly. The most obvious is air travel, especially abroad and on vacations, but also for business. Related to that is patronizing hotels and resorts instead of spending vacation and leisure times close to home. This discovery was initially inspired by fear of terrorism, but has since become motivated by other factors too.

The result has been an economically devastating slump in air travel and hotel and resort bookings, both here and abroad. Even local restaurants and theaters have suffered. That slump has been aggravated by the worldwide economic slowdown since 2000. Recently, these industries have been further depressed by the SARS epidemic in Asia, especially in Hong Kong and China, and by war in the Middle East.

On the other hand, businesses that cater to home and family activities have been booming. Home furnishings, gardening, outdoor recreation, home entertainment systems, appliances, and even cooking programs on television are doing well. People are “nesting”: focusing on their close-to-home lives rather than on other uses of disposable incomes. That is one reason why home sales have soared – also aided by low interest rates and a flight of capital from the stock market. This new focus on one’s personal life also helps explain why so many hotels and resorts have opened health, beauty, and fitness spas to attract new business in this environment.

When the U.S. economy starts recovering strongly, airlines, travel businesses, meeting planners, and hotels and resorts are hoping their usual activities will return to something like pre-9-11 levels. But I seriously doubt this will happen. The truth is that Americans previously were preoccupied with activities that are in reality easily dispensed with. Vacation travel to exotic destinations is the most obvious example. After all, there are plenty of interesting places to visit within the United States, and many can be reached by car at less expense than by air. In the same way, foreign tourists can just as easily stay in their own countries as visit America. Tourism is the single largest industry in the world; so when it suffers a major decline, economies the world over are hurt. Some regions like Hawaii and the Caribbean are heavily dependent on tourism, and thus especially vulnerable. This is one way in which terrorism has already seriously injured myriad economies all over the world.

Lots of other “normal” activities are also dispensable. Many business trips can be replaced by phone calls, e-mails, or video conferences. Whole industries are dominated by the sale of goods and services that can hardly be considered necessities. A lot of goods, gadgets, fashion items, and trinkets that people buy during periods of prosperity can easily be done without. People can also hold onto their existing cars, clothes, computers, televisions, and appliances a little longer than they have in the past, thereby reducing annual sales levels in those industries. Billions of dollars are spent each year in advertising aimed at persuading people they ought to buy something new right now that they could easily postpone indefinitely, or just forget about.

As a result, the world economy is vulnerable to prolonged slumps in specific activities that are highly dispensable. Moreover, once people have discovered that they can do without certain activities, there is a strong chance that many will not resume the former levels of spending, even when prosperity returns. I believe that is the situation facing airlines and the hospitality business, and many producers of luxury goods and services. Hence investors contemplating putting money into those businesses should be extremely cautious. They surely do not want to become additional victims of the huge negative impact that terrorism has already had on the world’s prosperity.

stock market standing 2002

First, the stock market took another nose dive. From the start of 2002 until Nov. 27, the NASDAQ composite index was down 25 percent, in spite of a recent rally. The S & P 500 fell 19 percent in that same period. Millions of owners of stock thus suffered large equity losses. Second, job formation was very weak. Unemployment rose to 6 percent in April and again in November, and total job growth was less than one-half of one percent – compared to an average of 1.7 percent from 1992 through 2000.

Third, certain key sectors of the economy were in the tank economically. These include the airlines, hotels and resorts, the telecom and internet industries, and state governments – which are suffering from enormous fiscal deficits. Fourth, commercial real estate markets deteriorated greatly and are experiencing a true recession, even though the overall economy is not. Office and industrial vacancy rates shot upward because of an unprecedented withdrawal of demands for space, plus huge surpluses in sub-leasing and rented-but-not-used space. Rents fell, but property values for well-occupied buildings and for most real estate investment trust shares were held up by strong demands from investors fleeing out of stocks.

Finally, there was – and still is – a tremendous amount of general uncertainty and insecurity because of the war on terrorism in general, and the possibility of war in Iraq in particular. The resulting malaise was intensified by the episode of the Washington-area snipers, who showed that any part of the nation could easily be terrified and upset for weeks by just two renegades.

As we look ahead into 2003, several of these factors will continue to make many Americans feel bad, but others probably will not. We hope the stock market has bottomed out and therefore will not take another nosedive – though no one can be certain. The heavily depressed sectors are likely to stay depressed, unfortunately, and job growth will probably be low again too. Commercial property markets are not going to get much better, but perhaps they will not get much worse either. Uncertainty caused by terrorism and Iraq are still with us as 2003 begins, and surely the former type will remain even if war either is accomplished or becomes less likely. So we will probably feel slightly better in 2003 than in 2002 – but not a whole lot better – even if real GDP again grows in the three percent range, which seems likely.

The balance of supply and demand in early 2002

U.S. commercial office, industrial, and research property markets are experiencing paradoxical conditions. The balance of supply and demand for space is extremely unfavorable. Especially in high-tech markets like Silicon Valley, vacancy rates have soared to 15 percent or more in early 2002. Few leases are being signed because almost no firms need more space, and thousands that need less are flooding markets with sublease space. Yet for properties fully leased at good rents, market demand has been strong and property prices rising. The stock prices of real estate investment trusts (REITs) have also been driven upward while the rest of the stock market stagnated.

The main reason for this paradox is that investment yields have recently been so low on stocks and bonds. Therefore, the steady positive yields on real properties that are well occupied or on well-run REITs look very attractive to yield-hungry investors. So they have shifted a lot of money from stocks and bonds into commercial real estate, which often produces yields of 8 to 9 percent. This has stabilized or raised prices on many well-occupied properties in spite of adverse conditions in space markets.

This paradoxical situation only applies to properties well enough occupied to produce steady net incomes, not those with high vacancy rates. This situation is occurring within property markets experiencing unusually low levels of both leasing and sales transactions. Leasing activity is low because so few firms want additional space. Some sales are occurring, but many fewer than in a normally sound market. Buyers are deterred from making offers because of uncertainty about the true value of properties in a market where few leasing transactions establish likely future rent levels. Property owners are deterred from selling by similar uncertainty, and by the fact that many are large corporations that own commercial properties they have been using themselves. Also, institutional owners like pension funds have been reluctant to sell because they don’t know what they would do with the money.

How long will this paradoxical situation last? One way it could end is by the return of strong general prosperity. Yet vacancy rates are now high enough so that even expanding space demand will not create much upward pressure on rents and prices for at least two years, and perhaps longer. This means entrepreneurial owners of older, relatively obsolete buildings with strong occupancy and yields should consider selling them now, before a return of general prosperity sucks yield-hungry money back into stocks and bonds.

realistic goal

In the Housing Act of 1949, Congress established a national goal of “Providing a decent home and a suitable living environment for every American family.” However, this has never been a realistic goal. Throughout American history, millions of poor households – particularly recent immigrants from abroad – have lived in overcrowded and often deteriorated slums because they could not afford “decent” dwelling units, as defined by prevailing middle-class quality standards. Congress has never provided the financial means of achieving that goal for all poor American families who cannot afford to achieve it on their own, since doing so would be very expensive to middle-class taxpayers. This is just as true today as it was in the late 19th Century or the early 20th Century. We depend upon overcrowding to shelter millions of our low-wage workers and their families, whose efforts are vital to the operation of our economy. We will not permit anyone to build units small and simple enough to house them without crowding because nearby homeowners think such units would devalue their own homes, which are their major assets. In order to protect their interests, we condemn the poorest households to live in overcrowded and often deteriorated dwellings. Recent influxes of many poor immigrants from Latin America, combined with soaring housing prices – especially in California – have greatly expanded our reliance upon such slum housing. Yet resistance to building even “decent” multi-family housing for low-income households is intensifying everywhere, thanks to NIMBYism and increased dominance of local policies by parochial homeowners. Let’s face it: maintaining slums is an unspoken but crucial part of American housing policy likely to expand even more in importance in the near future. It is the price we compel our poorest households to pay to allow middle- and upper-income homeowners to gain significant increases in wealth from rising home values.

U.S. economy standing [predicting]

Many economists are predicting that the U.S. economy will start into the next expansion by the third quarter of 2002 at the latest, and that real gross domestic product will be growing smartly by the end of 2002. Even if these predictions come true, I do not believe commercial real estate will move out of the current OVERBUILT PHASE of its three-phase real estate cycle until past the end of 2002. I believe the real estate cycle ended its preceding DEVELOPMENT BOOM PHASE, which began in early 1997, in about mid-2000, when it then entered the current OVERBUILT PHASE. But the typical OVERBUILT PHASE lasts until well after the general economy has begun expanding upwards from the bottom of a recession. Though such a general expansion raises demands for space, at first there is enough available supply left over from the preceding DEVELOPMENT BOOM so that rents do not rise enough to justify new development. This is the third or GRADUAL ABSORPTION PHASE of the real estate cycle. During this phase, rents rise and vacancies decline as the general economy grows, but little new construction begins. Eventually, rents rise high enough, and vacancies fall low enough, so developers start building new projects again in the next DEVELOPMENT BOOM PHASE. Every developer could be in a good spot if gets payday loans online. But that will certainly not occur in 2002 and probably not in 2003 either. True, the current OVERBUILT PHASE will not be nearly as long or as difficult as the one from 1990 through 1993, because existing space surpluses are much smaller than those in the early 1990s. But 2002 is sure to be a year of coping with rising vacancies and downward pressure on rents and property prices, at least in most office, industrial, and retail markets.

Stocks of Real Estate Investment Trusts

“Smart Growth” is a code word for whatever the user of this term wants to achieve concerning metropolitan development Yet different users of the term have totally different goals, so “smart growth” can mean almost anything. In spite of its diverse and often conflicting meanings, all parties superficially endorse “smart growth” because it is clearly superior to the alternative: “dumb growth.”
Many people claim we are now in the “information age;” so old-fashioned activities like agriculture and manufacturing do not matter much anymore. Nonsense. The information age wouldn’t survive for a minute without an immense amount of manufactured equipment, and eating is still a nice idea. True, those sectors are not growing as rapidly as the information sector, but innovations in the older sectors still present great economic opportunities.
Stocks of Real Estate Investment Trusts did poorly when the high-tech sector was booming even though real estate markets themselves were strong. That happened because REIT stocks seemed to offer far lower potential returns than high-tech stocks. When stocks of much of the high-tech sector tanked at least temporarily, REIT shares did much better because real estate markets have remained strong. So REITs looked better relatively. That improved REIT performance will probably last as long as (1) real estate markets remain strong, which they will in 2001 though market prices and rents will soften somewhat, and (2) high-tech stocks do not stage another spectacular rally, which seems unlikely for at least a while.
Many suburbs use “fiscal zoning” to decide what types of housing they will allow within their boundaries. If a certain type of housing does not produce more in local taxes than it costs the city government in local spending – including schools – the community designs building codes and zoning rules that keep that type of housing out. Since low-cost housing and multi-family housing are such “fiscal losers,” this approach prohibits such units. But the affluent residents in that community need the workers who can only afford such housing to mow their lawns, run their cleaners and laundries, staff their hospitals, even run their police and fire departments and teach in their schools. Yet if every suburb adopts such “fiscal zoning,” there will be no place for those low-and-middle-wage workers to live – except doubled up in illegally overcrowded units. That is why every community should be legally required by its state legislature to permit a certain fraction of its housing to be low-cost and multi-family units. And every consultant who does a “fiscal impact” study of proposed new housing ought to point out to the city concerned that excluding all residential “fiscal losers” is an irresponsible and unfair policy.


Economists are notorious for thinking in depth about the macro-situation but not being very sympathetic to individual persons. This is illustrated by something that happened in Washington D.C. lately. A homeless man approached a minister. “I haven’t eaten in three days.” The minister said, “The Lord will provide,” and passed by without giving him any money. The homeless person then approached a politician and said, “I haven’t eaten in three days.” The politician said, “It will be better after the election,” and he passed by without giving him any money. The homeless person then approached an economist, in fact, it was Alan Greenspan, the Chairman of the Federal Reserve Bank. The homeless person said: “I haven’t eaten in three days.” Greenspan replied: “That’s very interesting. How does this compare with the same period last year?”
A man sneaks into his bedroom at 7 am. carrying his shoes in one hand and moving softly, hoping his wife will not wake up. But she does, and she snarls: “Where have you been? — You’ve been out all night!” He says, “No, I haven’t been out all night. I came in last night about 10:00 and saw that you were already asleep, so I went out in the back yard and slept in the hammock so I wouldn’t disturb you.” She says, “Is that right?” He says, “Yes, that’s right.” She says, “It may interest you to know that last week, when I was cleaning up the back yard, I took down the hammock, put it in its box, locked the box in the basement closet, and put the key in my purse. What do you have to say to THAT?” [EMPHASIZE THE WORD THAT]. He looked her straight in the eye and said, “That’s my story, and I’m sticking with it.”
An old man visits his doctor for an annual check-up — a doctor whom he had not seen before. After the examination, the doctor says: “You’re in great shape for man of 65.” The old man says, “Who says I’m 65? I’m 80.” The doctor says, “That’s remarkable. How old was your father when he died?” The old man says, “Who says my father is dead? He’s still alive, and he’s 104 years old.” The doctor said: “That’s amazing. Does this longevity run in the family? How old was your grandfather when he died?” Old man: “Who says my grandfather has died? He’s still alive at 124. Not only that, he’s going to get married next week.” Doctor: “Why in the world would anyone want to get married at the age of 124?” Old man: “Who says he WANTS to get married?”
A farmer has two teenage sons who are starting to use a lot of profanity, so his wife wants them disciplined. The farmer says, “OK — tomorrow morning I’ll start disciplining them.” The next morning the farmer and his wife are sitting at the breakfast table when the two sons come in with a clatter. The oldest one says, “Where are the goddam cornflakes?” The farmer, who is a huge man, stands up, grabs his son by the throat, gives him a right cross [GESTURE WITH RIGHT CROSS], throws him up against the wall, and goes over and stomps on him. He picks him up, throws him back onto a chair, and then asks his other son: “Now what do you want?” The other son says, “I don’t know, but you can bet your ass it isn’t cornflakes.”
A new resident of Seattle arrives on a rainy day. She gets up the next morning and it is still raining. It continues to pour for the rest of the week. She leans out the window and sees a little boy playing on the porch below, so she asks: “Hey, kid, does it ever stop raining around here?” “How should I know? I’m only six years old.”
A third grade student is asked to name the ten commandments, when he got to number six, he said “Thou shalt not admit adultery.”


Traffic congestion can be confusing. Recently Irving Allen was driving along a crowded expressway when his car phone rang. He picked up and his wife said to him, “Irving, be careful! I just heard on the radio that some idiot is driving the wrong way on the same expressway you’re on.” “That’s right,” said Irving, “but it isn’t just one guy going the wrong way — they’re are hundreds of them!”

Four expectant fathers are pacing the floor in the waiting room of the Maternity Ward in a Minneapolis hospital. Then a nurse rushes in and says to the first man, “Congratulations, your wife just gave birth to twins!” He said, “What a coincidence — I play second base for the Minnesota Twins.” Suddenly another nurse rushes in an says to a second father, “Guess what — you are now the father of triplets!” “Amazing,” says the father, “I work for the 3M company.” A third nurse enters and says to the next man, “You have just become the proud papa of quadruplets!” “This is getting eerie,” he said, “I work for the Four Seasons Hotel.” Upon hearing that, the fourth father fainted dead away. When they revived him, he moaned, “I knew I shouldn’t have taken that job with Seven-Eleven!”
It takes time to amass capital, as my own experience shows. When I was just a kid, I used to play a popular game called “Spin the bottle.” Perhaps it was before your time, but in this game, a girl spins a coke bottle, and when it points at a boy who is playing, she has to either kiss him or pay him a nickle. I played this game a whole lot when I was young, with the unexpected result that, by the age of 14, I owned my own home.
A confirmed Catholic who had a reputation for fast living was on his death bed, so the local priest came to give him the last sacrament. As part of the ceremony, the priest said to the dying man, “Do you renounce Satan?” There was no answer. The priest said again, “Do you renounce Satan?” After a long pause, the dying man said, “Now wait a minute, Father — I’m not sure where I’m going, and this is no time to be making enemies!”
A rookie ballplayer is trying out in right field at a major league spring training camp. He misses the first three fly balls hit to him. The coach calls him over and says, “You’re terrible! You can’t catch anything!” The rookie says, “Oh yeah, well if you’re so good – let’s see you try a few balls.” He hands the coach his glove. The coach says, “Sure, I’ll show you.” But the coach also misses the first three balls hit to him. He comes back over to the rookie, throws his glove down on the ground, and shouts: “You’ve got right field so screwed up, nobody can play it!