Residential Real Estate - Time to Move On


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Believe it or not, the great residential real estate crash of the last few years will turn out, in the long run, to be VERY good for the U.S. and the global economy.

Here's why:

The Fixation on Housing Prices Has Been and Is Unhealthy: The word that comes to mind when reflecting upon the government subsidies (see mortgage interest deduction, first-time home buying credits, etc.) and media attention given to housing prices is distorted.

Sure, the price of homes is important, but is it more important than educating our children? Than the health of our startups and small businesses? Than our global competitiveness?

Maybe it's me, but the America I love isn't one whose economic and social health is judged by how climate-controlled the big-screen TV room is, or how comfortable the couch.

Now I am not saying that a lot of people haven't been badly hurt by this recent (though not unprecedented) popping of the real estate bubble nor that our love of homes has turned us completely into a nation of unadmirable shut-ins and couch potatoes.

But if we must choose (and we must), I'll cast my lot with the young, highly educated, preferably immigrant software entrepreneur, working out of  their cramped garage, over the slow-to-innovate home-builder or mildly educated real estate agent.

Innovation, Not Bigger Bathrooms, Drives Wealth-Creation. As noted in my review of Matt Ridley's fantastic book, "The Rational Optimist," the source of all wealth-creation is innovation (i.e. technology).  While there have been of course many meaningful innovations in housing over the years, it is illustrative that the basic living schematic - bed, bathroom, kitchen - hasn't really changed much since Roman times.

Following up on this point and to my blog post last week let's remember that it is services not "stuff" that power the U.S. economy. And while the real estate industry creates a lot of service jobs for sure, you have to look elsewhere to find the really high value-add, high-paying ones (see software, financial services, energy, healthcare).

So what to do about it? Here are three quick ideas:

1. Eliminate the Mortgage Interest Deduction and Replace it With a Startup Business and Investment Credit.  As opposed to the government granting a $100 billion annual tax break to homeowners with the mortgage interest deduction, give it instead to the entrepreneurs - who, on average create 4 net new jobs every time they start a new business - and those that invest in them.

How transformative would this be? Remember that total venture capital and angel investing in a typical year doesn't add up to more than $50 billion, or about one-half of the mortgage interest tax break.

A tax break re-allocation of this nature would at least double the number of new businesses and investments in them every year. In addition to the millions of jobs created, the innovation gains that would result would be awe - inspiring.

2. Let Prices Fall.  It is time for all homeowners to just take their medicine (or, more accurately, even more medicine) and let prices fall to where the housing demand meets supply.

In addition to being the right thing to do in a market economy, significantly lower prices would be a huge boon to new homeowners. 

And as these new homeowners tend to be younger people, the time and money savings of lower housing costs could go to more societally beneficial pursuits than remodeled bathrooms - like perhaps going to back to school or starting or investing in a business?

3. Just Stop Talking About It.  My favorite because it is easiest and will have the quickest effect - let's just stop talking about residential real estate. Too much ink and mindshare have been wasted on it these last few years. 

This would not be all that bad if the coverage was somewhat balanced, but as it is almost universally presented in an "the end is near" tone and focus, falling home prices have been unfortunately equated with the health of our economy and our society.

Let's use better, more 21st century measures of well being - like our kids' science and math scores  or the speed of innovation in those high value-add service fields like healthcare, energy, and software.

More attention here will mean more human progress, more wealth for all of us.

And maybe this time, with all that new wealth, instead of building bigger bathrooms, we do something with it that's just a tad more...inspirational?

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Each year, Growthink reviews hundreds of startup and emerging company opportunities and selects those with the best management teams, market opportunities, and financial prospects.

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To your success,

Jay Turo

Jay Turo

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Tom DeMattia says

Great article I hope you do not mind If I Share this with my readers
Posted at 4:25 pm
kevin Blackman says

Any news or ideas about Bovie ?
Posted at 4:40 pm
Wade Lillico says

A grate day to all.... As a inventor and an investor I have had a good look at the investment world and my own practices ..... All the focus seems to be on the grate pitch , business , plans , return on investment ...... Why are we turning a blind eye to the janitor that has to better mop. or the plumber that built a new multi tool . these people have no chance in most cases of coming up with the funds to prototype there idea or the expertise to wow use with a good pitch ..... And yet they are inventing incredible products that at this time will never see a store shelf ( I think its sad that thinkers like this slip through the crakes )
Posted at 3:18 pm
Frank Brock says

Real estate will come back when the financing comes back. Conventional loans have increase credit scores, decreased debt ratios to the degree that home buyers do not even want to apply. There is no more Alt-A programs and nothing for the self employed borrower who writes off everything on the tax returns.
Posted at 4:46 pm
Riley Bowman says

As an entrepreneur formerly involved in the real estate industry (I was a homebuilder), I disagree with a number of your points this time, Jay. While I most certainly agree that more needs to be done to stimulate entrepreneurs, investors, and job creation, I don't think we can get away from the fact that the real estate market is a significant part of the American economy. I don't agree with most of the things the gov't has done to try to fix the housing market, because I recognize that it was a temporary and artificial boost that fell flat once it expired. I think we should ride out the housing market slump and allow the market to adjust itself to where it needs to be. However, this will not occur until the rest of the economy starts coming back. This is where tax cuts are necessary, and instead of eliminating tax breaks for homeowners in place of giving them to businesses, there should be tax cuts instituted across the board! Past economic history shows this is what will bring an economy around.
Posted at 12:09 pm
Ken Ricci says

I couldn't agree more. Obsession with having more stuff--and a bigger house to store it all-- has taken precedence in American life over being a better person, a "complete human being," and looking to make the future better than the past. Once we have the basics covered--food, shelter, medical care, safety and security, an occupation or calling that allows us to be contributing members of society-- to what should Americans aspire? To better relationships and fresh skills; to building or joining institutions that will improve the future; to solving problems that present serious long-term challenges. Currently, after the basics are covered it would appear that most Americans aspire to acquire more stuff, a bigger house to put it in / park it next to, and to spend more time and money on entertainment. That would not seem so bad if we were facing a future of endless perfect summer days with abundance for all. But we are not: there are serious problems with our future in terms of economics (national debt, social security & health care economics to name just three); in terms of energy (fossil fuels dependence and eventually limited petroleum reserves); and in terms of international growth. What will happen as the other 96% of the world moves toward the same level of consumption that we currently enjoy? Right now, that picture is not pretty unless we make some big changes. Until problems like these are solved (and it is questionable if they ever will be), an empire that has a can-do culture of progressive action, an attitude of "if we don't work to make the future better, it will almost certainly get worse instead," will have a positive future; while an empire with an attitude of "where's my share, where's my nice house and fancy car?" will likely see a decline in its quality of life. But our commercial propaganda states the exact opposite of what I just wrote. "You deserve to have a life of luxury. Enjoy life now, and buy, buy, buy." We must educate ourselves and our children to resist our own marketing, and redefine our economy as more progressive (improvement-oriented) and less consumer-oriented than it is now.
Posted at 6:32 pm

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