Sunday, July 19, 2009

More Thoughts on the OBX Economy

Sometimes a little knowledge can be a dangerous thing. Or, it can spark a renewed interest in intellectual pursuit, especially the study of why things happen and how. In my undergraduate days, I concentrated my electives almost as tightly as my major; my B.A. was in Political Science, but the bulk of my other electives were in History and Economics. I chose my M.A. program for the same reason; International Studies required at least some graduate hours in Econ and History in addition to Political Science courses.

The result was that by the end of grad school, I had 18 hours in Economics, and I've now added six more, with six to go. In addition, working in banking for 30 years has added some practical experience.

The six hours of Econ I took over the summer involved a survey of eight books, some very current. The books broke down into four categories; the problem of foreign aid, the tax code, Fed policy and the current economic crisis, and the theory of risk management. Two of those areas directly impact the field of banking and real estate; one more (the tax code) can affect real estate in both positive and negative fashion.

In terms of risk, and more importantly, Fed policy, I think I have learned enough already to draw some conclusions about what happened here (it wasn't the same as in the rest of the country), and attach that to my bank experience. In addition, several sets of data that are available locally, but more importantly, data collected by David Watson of Southern Shores Realty dovetails perfectly with the pattern of events I think I see in the local economy. With David's permission I plan to begin incorporating his data with my own thoughts and the research of expert economists to draw a more complete picture of what happened and why it occurred. Sorry, I won't be predicting when it all ends.

Another hope is that I can cobble enough of a hypothesis together to write a bigger-than-a-term-paper but smaller-than-a-thesis to convince my Econ professor at ECU to count three more hours as independent study. This will come out in bits and pieces here, and I will still cover restaurants, local politics, and humor (although studying Econ 24/7 certainly doesn't inspire one's funny bone).

But, let me add one thing early on. Too often, we in the private sector dismiss academics and their research as having little or nothing to do in the real world of business. After reading just three books on Fed policy and risk, it struck me that we in the business world would do better if we actually continued our intellectual studies in related fields rather than wasting time on all those business-related fad courses (what personality type are we as managers, how do we effectively cross-sell and uncover selling opportunities among customers, etc, etc).

What I have learned over the summer is that even though lending is a form of risk-management, we as lenders, and our backstops, the credit managers, really don't understand risk on a large scale. We depend too much on micro-risk (analyzing the last three years tax returns, evaluating collateral based on appraised value, meeting minimum ratios of debt coverage), and completely ignore macro-risk; what is going on in the larger universe locally, regionally, nationally, and yes, even globally. Even more striking, I suspect the majority of bank CEO's, be they large or small institutions, pay little attention to economic theory other than what they see each day--the yield curve, Fed rates, long term Treasury rates and the like.

Another thing we ignore is data available locally. In some cases, no one gathers it. In cases where it is gathered, few banks track the results and string all the various data points together in something that might have prevented some of mess we find ourselves in today.

Its easy to pay lenders based on production, and its easy to judge the value of a credit manager based on the loss percentage in his or her portfolio. But while most credit managers are good at tearing apart a loan request, or approving an obvious "yes", few are well-trained in analyzing their markets, nor do most have the time to perform that function even if the subject interested them.

I hope some of what we publish here on these issues will be interesting. We'll see. And, we'll see if my little bit of new knowledge is a dangerous or useful thing.

2 comments:

Bill Holt said...

Russ,

This should be a very interesting series and conversation. Yes, I really agree... what happened here is different than what has taken place in many other areas, even other vacation rental investment type economies. David is a wealth of experience and resource and I am excited he has lent information to facilitate some additional perspectives. I have talked a little with David about this and will enjoy a good dig and sharing of thinking that includes some good minds here on the Outer Banks.

I hope a few others will contribute and post comments. We all need to be thinking and sharing thoughts and ideas... maybe even some directive solutions base on these ideas and an understanding of the less visible facts about what has happened here.

Ours is really different and the recovery here will take a recognition of the difference as we look for and apply solutions.

I look forward to reading and contributing where I can...

Bill Holt - RE/MAX Broker &
Accredited Consultant In Real Estate

dukestarco said...

bring it on. We are in the 2nd half of the 3rd year of this 1 year correction that grew to a Real Estate Bubble to an economic meltdown. The trouble I see is there are thousands of experts all telling us different things. We were together last week when the Rotary President asked me if I knew when the slow down would end. I don't have a crystal ball but I bet I could guess as close as the experts. What surprised me is that this man thought I might have the answer. People are grasping at anything that sounds like good news. The Real Estate blogs and State and National Associations continue to spin the news that everything is getting better ever week. They will show numbers and talk about what a great time to buy and Charlotte or Raleigh are already on the road to recovery except it is nothing but spin. Home Builders reported that building permits went up 14% in June. Has anyone seen any lumber trucks running up and down the bypass? Home Builder spin. I see the Fed trying to raise prices with Green mandates, more environmental rules and a grab for water rights across the country. Small businesses will have to pay for employees health care so I don't see many staying in business or they will seek out the illegals to skirt around the mandate. NC Legislature just approved an obscene increase for the insurance industry for HO rates. I doubt if the Senate will have the courage to go against the Insurance industry so expect you payment to increase this year. So please Russ, study the local numbers, ask David Watson to please keep giving us his sales numbers and try not to spin the information. I want OBX numbers and really could care less about Washington or Raleigh or anyplace else right now. I want the OBX to survive and I still welcome our visitors for 13 weeks every summer with a smile.