Probably the most succinct to the point explanation of the difference between economic forecasting and astrology was summed up when John Kenneth Galbraith said:
“The only function of economic forecasting is to make astrology look respectable.”
Since, of late, I’ve been propounding one be an expert in one’s local economics if one wants to be successful in the real estate investing business, I thought I’d write a word or two about what I’ve been preaching. You see, it is my opinion, economic forecasting in the micro versus the macro is the key.
I’ve also said using your local newspaper as a piece of the barometer will be useful in your endeavor. Mind you, if your paper is like mine, you can also find the astrology section and use it too.
Here is an extract from a story in the 2-22-09 online version of the Reno Gazette Journal. It talks about our retail vacancy rate which is one of the factors I believe is useful in determining not only what but how much my audience can afford.
The story opened with the news of already shuttered businesses. Those closed include Mervyns, Gottschalks, Krispy Kreme, T.G.I. Friday’s, Circuit City, CompUSA and On The Border (a local huge Mexican cuisine restaurant).
Mind you these weren’t the only retail establishments to close. They were just the big names. There actually were dozens more. The article did not include the 3 casinos that closed and let about 1,000 people enter the unemployment line.
It was so bad that our 7.9 percent retail vacancy rate in 2006 rose to more than 14 percent by the end of 2008. The term “vacancy rate” always means unemployed people. Granted some of them found work in other establishments and some moved out of town. But, that is still a hole for those of us who plan on selling, renting or leasing real estate, right?
The article also pointed out that people were frequenting restaurants less, buying fewer clothes and other consumer products. The truth is, no one knows for sure how many of the restaurants, for example, that are still open will be open by the end of the 3rd quarter of this year.
That is important because people who work in restaurants, and other small retail operations, generally don’t buy, they rent. And, they rent from you and I who own the rental homes and apartments. Without a job, they can’t pay their rent. I believe you know the rest of the story.
Here‘s the key in this scenario and it doesn’t take a great understanding of either astrology or economic forecasting to understand. Rents in all sectors of the real estate niche are coming down.
Not only are they coming down, but the rate of retail closings are expected to continue in 2009. Closings is another word for unemployed people. Unemployed people don’t buy, rent or lease real estate. I bet you can tell me what that portends for rent rates.
I don’t put these words to paper to lament about Reno/Sparks, Nevada. We are resilient and have popped back before. I write this stuff because I’d bet if you don’t live in Washington, D.C. (it is the only city that hasn’t experienced the recession according to an article in the WSJ), the same type of “closings” are happening in your area. I write this stuff because now, more than ever, you may have to pay closer attention to economic forecasting.
Of course, if your astrology chart is already doing that for you, wonderful. I also believe you should keep using whatever is working for you-:).
By the way, Galbraith had some other doozies but I’ll leave that for another post.
Photo Credit: GrahamWilliam