Monday, March 15, 2010

Buy Florida Real Estate...and What Not to Say as a Pilot in a Storm

Flew down here to Florida for some r&r with the family this past Friday. Without a doubt, it was the most frightening flight of my life (fortunately for my family, they came down the prior week). We took off in a storm up north, and flew into an even worse one in Florida. Now, having been airborne something approaching 1000 times, I am little bothered by turbulence. But this took it to a different level.

The final two hours of the Jet Blue flight were non-stop, bone-rattling, amusement park ride-like turbulence. No let up. I remember trying to turn on the little air nozzle above me but having trouble connecting my hand to it. The Chinese woman beside was quietly praying, while the woman across the aisle dealt with it by talking constantly, trying to be analytical.

Another woman yelled, "I can't take this anymore!" while others cried quietly.

The problem was that when we got down to roughly mid-Florida, after an hour of pitch, rattle, and roll (and a good dose of yaw), the pilot, who had been silent the whole time, came on by saying, "Well, I hope you all have been having a better flight than I have."

What? This is not what we want to hear. We want unflappable. We want I used to land F-16s on the decks of aircraft carriers in the middle of typhoons, so this is a cake walk. I can do this in my sleep. What we got instead was nervousness, and then the news that Miami and Ft. Lauderdale were closed, so we were in a holding pattern. Not to worry, though, we're monitoring fuel levels. This was the part that concerned me. Unpleasant as the turbulence was, I knew that turbulence rarely knocks planes out of the air. But I had just finished reading Outliers by Malcolm Gladwell which has a whole chapter on a commercial jet going down in New York because they hadn't properly monitored fuel levels, and now we were being told, half an hour after our arrival time, that airports all across southern Florida were closed. We were in a broad holding pattern, at an altitude that was maximizing the effects of the storm.

We continued to circle, bouncing around and burning fuel, while many of us wondered how much fuel it would take to get to Orlando (our destination was Ft. Lauderdale). Orlando was sounding good.

Of course, I'm writing this, so we made it. The weather broke over Ft. Lauderdale, and the pilot got the damn thing on the ground. Loud applause ensued.

But, we all agreed, when things aren't going well, a pilot should:

1. Communicate more, not less

2. Never, ever, acknowledge the slightest concern

Now, about Florida real estate. When I think about where to put money, not a lot of options jump out right now. Stocks? No, given public policy right now, they scare me, particularly after the giant year-long rally. Bonds? Yuck. That same public policy is likely to produce inflation. Cash? At zero? Hmm, not with my whole portfolio.

I like hedge funds (for the same reasons I outlined in January), but not everyone has an easy way to invest in this asset class.

So what about real estate? The answer is highly dependent on location. I would not touch California or New York, for instance (where of course, I own property). The fiscal situation in both is too dire, with no visible way out. These states are controlled by public sector unions that will take down the ship before they bend on even minor points. New York's pension obligations, for instance, are beyond imagining, which is why most of politicians don't bother trying. They merely hope the day of reckoning will come after they have feathered their nests.

The tax situation, already horrible, will get worse. This will further trash real estate values, and promote taxpayer flight. The data show emphatically that state populations are highly sensitive to taxation. New York and California have each lost a million and a half people in recent years. Delaware imposed a "millionaires" tax a few years ago and - surprise - the millionaires split.

Florida, though, is a compelling story. We own a small place down here and it's an investment I'm very comfortable with. Florida is one of only seven states with no income tax, the others being Alaska, Texas, Wyoming, Tennessee, South Dakota, Nevada, and Washington. This alone will attract people in large numbers, particularly at the higher income levels (people who have a disproportionate ability to drive the economy, in other words). I have personally listened to a number of New Yorkers strategizing on how to stay out of New York for six months (plus one day) each year while declaring Florida their residence.

But there's more to the Florida story than simply the tax haven angle. The baby boom began in 1946, which means the first boomers are hitting retirement age right now. More often than not, people retire where it's warm. I believe this is a powerful demographic wave that will drive Florida (and maybe even Texas) home prices far higher. This is a trend that will last for years.

Finally, because of the national real estate meltdown, everything is on sale. Florida development, in particular, got way ahead of true demand. But the market is in the process of clearing. Here in Key Largo, transaction volume is way up over last year.

Florida real estate. Sounds like a cliche, I know.


  1. Scott: I was on the ground on vacation in SW Florida during the squall that you survived. Worst weather I've seen in the state in 35 years. This was the same storm that ended up in the NE and wiped out power lines for days.

    High-end FL real estate is now a bargain, and has held up better than mid- and low-end stuff, which has gone the foreclosure route as middle-class jobs have disapeared. Job prospects are still dim, and population growth, the real estate engine, has stalled.

    I don't know the East Coast situation well, but destinations like Naples, Sanibel and Sarasota are seeing prices down 20% and holding. But the economy as a whole will have to recover before the price march resumes.
    Chuck B.

  2. F-16s don't land on aircraft carriers.