WATCHING REAL ESTATE CYCLES.

Why is Real Estate Cyclical? Just about everyone knows that real estate prices cycle from high to lows depending on market conditions. As markets improve more and more investors, builders, and flippers want to get into the market. Rising prices and higher profits result in higher demand until prices strain affordability to the breaking point. When that happens prices level out or drop until speculators decide that opportunities are limited. Prices then level out or even drop. We watch several statistics to get an idea of the risk level in a given market. One very important factor is the number of building permits being issued. In one of our previous posts we showed that the number of single-family building permits decreased by 34% from 2006 to 2007. Condo/townhome permits decreased by 8.3% over this same period.

Is This Trend Continuing? Looking at January 2008 compared to January 2007 certainly leads to that conclusion. Last January there were 344 single-family permits issued compared to 548 the previous year. Looking at condo/townhomes, we saw only 88 new permits this year compared to 614 last year. This represents a decrease of 85.7%. Of the 88 permits issued 58 or 66% came from Denver and Jefferson County. Arvada, Aurora, and Arapahoe County reported no new permits.

Its Not Yet a "No Brainer." Markets may drop even further and there is no guarantee of success; however, each month has brought us some new encouragement. Stay tuned for the next chapter.

Cash flow Is Improving. Vacancy rates in rental units is dropping slowly and rental rates are starting to rise. One investor I know who has 40 years experience in the business is beginning to acquire units to rent out and hold for up to three years, at which time he believes the market will rebound and he can sell those units at a profit. Not a bad strategy for patient investors. Generally, the best buyer for these investments will be nearing peak earning years with ample income from other sources.

LOOKING FOR NEW ENERGY SOURCES

Why Don't We Just............. You fill in the blank. This statement is usually followed up by suggesting some alternative energy source like bio diesel, ethanol, hydrogen, solar, oil shale, etc. I don't want to burst any one's bubble when I tell you that it ain't gonna happen folks. At least, not in a hurry. So-called experts used to tell us that alternative energy sources would be practical when oil was 60 dollars a barrel or higher. With oil at almost $110 a barrel, you would think companies would be scrambling to bring new sources to the market. You can always bring the old paranoia back and say that the oil companies are protecting their vast wealth by destroying any attempts by entrepreneurs to develop alternative energy sources. Let me assure you that these companies are just as eager as you are to develop alternative energy. If they don't, their future is limited by a finite pool of fossil fuels waiting to be found. Many of these companies are using their profits to buy back their shares rather than search for new reserves because of the high cost of finding and developing those reserves. Here is the most important point you need to remember about alternative energy sources: It Takes Energy To Make Energy. What does that statement mean? Using ethanol from corn as an example, you have to use fossil fuels to cultivate the soil, fertilize, water, and harvest the crop. Then you have to convert the corn to ethanol and distill the ethanol to the desired purity. At the end of this process you have a fuel that you can use for energy; however, you get very little more energy out than you used to manufacture the ethanol. This example holds true for a number of alternative sources. Using current technology, by the time you consume the fossil fuel it takes to produce these alternative sources, you might as well have burned the fossil fuel for energy in the first place.

Are We Doomed? I don't want to imply that we can never have alternative energy sources, only that we have to use fossil fuels until we develop the technology to make these sources economically feasible. Of course we can conserve by limiting our consumption which means driving less, lowering thermostats in the winter, buying more fuel efficient cars, etc. This can help a lot in the short run but it only buys time. We need to obtain more domestic fossil fuels to use in the transition period between now and the availability of alternative sources. We need to utilize more of one alternative source that is currently available and that is nuclear energy.

I Am An Environmentalist. I love this planet and I believe we need to limit those things that do harm to it. I differ from the majority of those who call themselves environmentalists in that I realize we have to be practical. It is insufficient to just call our attention to the problems, we have to find solutions. Don't just tell me that the planet is growing warmer, tell me a practical, economically feasible way to prevent it. Don't tell me that we can't develop known fossil fuel reserves in the US, tell me how to find the energy we need without enriching the treasuries of those countries dedicated to bringing us down.

On a More Positive Note. I don't know how many of my fellow Colorado residents have heard about the purchase of the Louisville Storage Tech site by Conoco-Phillips. They propose to develop a huge research facility dedicated to energy research. They will be looking for alternative energy sources and more efficient ways to utilize fossil fuels in the interim. This could be very positive for the Colorado as well as the national economy. These are the kinds of steps we need to take.

How Important is All This? A recent poll shows that more people want to solve these energy problems than want a cure for cancer. While this may sound appalling to those of us who have lost loved ones to cancer, it shows how important this issue is to Americans. I will strive to discuss this issue more in the future and relate it the management of our current finances.