Las Vegas Downtown Monoculture Problem

gold_spike_downtownI recently visited Las Vegas, NV.

I did this in part to lose money at the poker tables, and in part to check out the Las Vegas “Downtown Project” that I’ve read about in recent years.

I visited with two questions in mind.

First, how does part of a city die?
Second, how do you revitalize a city downtown?

I’m no urban revitalization expert. I learned the little bit I know about the subject from a fifty year-old book by an author obsessed with Greenwich Village. Jane Jacobs answered the ‘how does a city die’ question by arguing that cities can become victims of their own economic successes. This happens when a profitable industry continues to grow until it metastasizes and wipes out other economic activities in the city. The result is an economic monoculture. And monoculture cities die.

In modern America, Las Vegas represents the archetype of a death-by-monoculture city. Las Vegas offers about 36 hours of tourist gambling fun, then turns sour. Monocultures are not attractive to live in for locals either. Monocultures tend to spread economic death, as residents move away or stay away.

So you can see why I was thinking about this when I visited Las Vegas. The attempt to catalyze an alternative to monoculture is what makes Las Vegas’ Downtown Project, inspired by an entrepreneur named Tony Hsieh, so interesting.

zappos_logoHsieh – who built and sold shoe seller Zappos.com to Amazon for $1.2 billion – has dedicated his talents and maybe $350 million on an experiment in answering the second question, attempting to bring Las Vegas’ downtown back to life.

Hsieh funds startups with a view to creating an inter-connected urban area for Las Vegas locals, an antidote of economic diversity for the city’s downtown area.

How SA is like LV

In a related story, I live within walking distance of downtown San Antonio, TX which, while an economically successful tourist draw, offers almost nothing of interest for locals. I know this sounds overly harsh to the few exceptional excellent restaurants and cultural centers there, but those can be counted on one hand as isolated islands, basically unconnected, in a sea of emptiness and tourism. I’ve lived thisclose to downtown for about six years, yet rarely go there. When friends and relatives visit, and they insist on seeing the Alamo and the Riverwalk, I try to warn them. Inevitably they find it as underwhelming as I do.

The ironic thing about this, obviously, is that the San Antonio Riverwalk was originally a stroke of urban-planning genius.
Also, I’m not denying downtown’s financial viability for the hotels, restaurants and Ripleys-style funhouses catering to tourists and conventioneers. I’m just saying that that economic success – the monoculture – has made it by and large an unappealing place to visit, as a San Antonio resident.

San_antonio_no_fly_zone
San Antonio No Go Zone For Residents

Since Las Vegas represents the ultimate monoculture problem, a problem many times bigger than San Antonio’s, I was intrigued to see what Tony Hsieh’s vision and money has wrought, despite the odds.

The Las Vegas Downtown Project

My quick answer: This is freaking awesome.

Further, I hope the myriad folks dedicating their vision and passion and money to downtown San Antonio are paying close attention to Hsieh’s Downtown Project experiment.

In an earlier post I detailed the small-scale pockets of excellence that make up the Las Vegas Downtown Project.

Any one of these Las Vegas places, if only they existed in San Antonio, would be a reason to go downtown, pretty much all of the time.

A downtown pulse in SA

Recent real estate investments by Weston Urban and GreyStreet partners on Houston Street indicate there’s a strong pulse among local developers. There’s no shortage of capital here, ready to deploy in the heart of downtown. That’s really not the problem.

The problems of revitalizing San Antonio and Las Vegas are (among others): Is there housing for residents? Are there non tourist-oriented jobs? Are there attractive public spaces? Are they walkable? Are they connected?

Frankly the Downtown Project in Las Vegas doesn’t have these things yet either, but each of their parts hold strong promise.

Most importantly – and this is what the Downtown Project gets right: Are there locally-oriented sources of urban excellence that would continually draw residents into an urban core? In Las Vegas, I found to my delight, yes.

Container Park, LVNV Urban Excellence For Residents
Container Park, LVNV Urban Excellence For Residents

So far, in San Antonio, not really.

Next I’ll write about the role of the visionary billionaire, haters, geography, and government.
Please see related posts:

The Tourist Problem according to DFW and Downtown Project Highlights, A version of which ran in the Rivard Report.

The limited role of government in curing a city monoculture

Book Review: The Death and Life Of Great American Cities, by Jane Jacobs

Is stock investing like a casino? No. But YES!

A version of this post ran in the San Antonio Express News.

 

 

 

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Las Vegas Tourists And The Downtown Project Antidote

 Who Killed Las Vegas?

freemont_experience
I’m the one with the shirt on

I recently stayed at a hotel and lost money at the poker tables in Las Vegas[1] situated squarely in the downtown monoculture of the Fremont Experience.

The Fremont Experience is as you would expect – flashing lights, zip-lines, elderly men in Borat-style mankinis – and good for the 36 hours (maximum!) that you plan to be there.

Which is to say, after a short while, it’s impossible to enjoy. If I lived in Las Vegas, I would avoid this place at all costs.

Just a few blocks away from the Fremont Experience, the Tony Hsieh-led Downtown Project has curated, funded, and purchased real estate for a number of locally-oriented businesses. Businesses catering to actual, real live, Las Vegas residents.

Each of these locations independently represents a glorious reprieve, a gulp of oxygen, apart from The Las Vegas Strip or the Downtown Fremont Experience.

I visited the Downtown Project locations with two questions in mind.

First, how does part of a city die?

freemont_experience
It’s the tourists and conventioneers, dammit

Second, how do you revitalize a city downtown?
I already know what’s killed the popular parts of Las Vegas, just like I know what’s killed downtown San Antonio (where I live.) For all the money that it brings, it’s also what makes the place unlivable.

It’s the tourists and conventioneers, dammit.

Insect on a Dead Thing

David Foster Wallace most devastatingly explained the problem of tourism in places like The Strip or the Fremont Experience in Las Vegas, or in my hometown of downtown San Antonio, in a footnote to his essay “Consider The Lobster.”

“As I see it, it probably really is good for the soul to be a tourist, even if it’s only once in a while. Not good for the soul in a refreshing or enlivening way, though, but rather in a grim, steely-eyed, let’s-look-honestly-at-the-facts-and-find-some-way-to-deal-with-them way. My personal experience has not been that traveling around the country is broadening or relaxing, or that radical changes in place and context have a salutary effect, but rather that intranational tourism is radically constricting, and humbling in the hardest way—hostile to my fantasy of being a real individual, of living somehow outside and above it all…To be a mass tourist, for me, is to become a pure late-date American: alien, ignorant, greedy for something you cannot ever have, disappointed in a way you can never admit. It is to spoil, by way of sheer ontology, the very unspoiledness you are there to experience. It is to impose yourself on places that in all noneconomic ways would be better, realer, without you. It is, in lines and gridlock and transaction after transaction, to confront a dimension of yourself that is as inescapable as it is painful: As a tourist, you become economically significant but existentially loathsome, an insect on a dead thing.”

Obviously we’re not going to print DFW’s views about tourists on the buttons of San Antonio Ambassador Amigos anytime soon, but I feel his pain.

Since Las Vegas represents the ultimate monoculture problem, a problem many times bigger than San Antonio’s, I was intrigued to see what Tony Hsieh’s vision and money has wrought, despite the odds.

If you’re curious as I was about what’s there, here’s a quick guide to highlights of the Las Vegas Downtown Project.

The Las Vegas Downtown Project

Eat – After the oversized Las Vegas buffets and the bland celebrity chef chains, the palate cries out for better food. In the morning after a night of poker I wandered off Fremont Street, seemingly past empty or underutilized buildings. It felt like out of nowhere that I found this bustling breakfast/lunch place, and nobody in there gave off a tourist vibe.

You get the sense of a brunch place responding to the vision of a single person or chef.[2] For San Antonians, think Liberty Bar on Alamo Street, or Il Sogno in the Pearl. Real food, prepared fresh. Very un-Vegas.

Playground_fun_container_park
An awesome kids/adults game in Container Park

Eat was my first Downtown Project destination, and it set the right mood. I didn’t realize it until I finished eating, but I was around the corner from Container Park, the most completely integrated part of the Downtown Project.

preying_mantin_container_park
The Preying Mantis from Burning Man at the entrance to Container Park

In Container Park, reused shipping containers provide the architectural motif for a self-enclosed ‘shopping mall,’ with unique stores, a kid-friendly tree-fort, a playground with hula hoops and giant toy building blocks, and a performing arts stage.

Over the course of two days in Vegas I visited Container Park three times. At night, a country-music band played while children gamboled in front of the small stage and parents drank beer. The kid-friendly nighttime scene reminded me of a large-scale Friendly Spot in Southtown, if The Friendly Spot had a flame-throwing preying mantis straight from Burning Man out front.

During my first visit to Container Park, I wandered in to Kappa Toys.

kappa_toys
Kappa Toys in Container Park

The owner, Lizzy, (with dyed-purple hair, a Cosplay-dressing style, and named for Jane Austen’s Pride and Prejudice heroine) comes from Austin by way of Brooklyn. She seemed to have carefully selected every item in her store. She knows where her items are manufactured and how they’re made. Like many owners who are part of the Downtown Project, she was recruited personally by Hsieh to bring her unique business to Las Vegas.

Lizzy – a compelling evangelist for the Downtown Project – recommended to me THE hangout place for a combination of coffee, cocktails, lawn games, and local party-scene – The Gold Spike.

Fully hooked on checking out the Downtown Project places, I headed that way immediately.

Here’s your first clue about how The Gold Spike differs from the casino monoculture: At the street level, the entrance has a blank, almost speakeasy type entrance.

I mean, I knew I was at the right address, and I had seen a large “Gold Spike” sign above the building from a distance, but the reflective doors to enter suddenly seemed forbidding. Was I allowed to go in? Will I need a special invitation? Is this even the place?

If I was a random tourist off The Strip or if I had wandered a few blocks from the Fremont Experience, nothing at the Street level of The Gold Spike made me welcome to come in.

Which. Is. Brilliant.

gold_spike_lawn_games
Gold Spike life-size chess set

Obviously this is a calculated move to attract local clientele, and break away from the tourist casino monoculture. Presumably that is the way you can get Las Vegans to go there.

In addition to the essential draws of caffeine and alcohol, The Gold Spike offers board games, and semi-curtained private spaces indoors for playing them. Outdoors, in a walled-garden area, there are bean bag toss games like cornhole, plus grown-up frat-style games like lawn-size Jenga, life-size Chess, and soccer-ball pool (which looks just like it sounds.)

At The Gold Spike I also saw my first Bitcoin Teller Machine (I do not approve!) and watched some young gentleman clearly in the drug trade make a withdrawal (I do not approve!) from this BTM.

bitcoin_teller_machine
I frown disapprovingly upon this BTM!

I spent many happy hours here. If I ever return to Las Vegas, I will only ever stay at The Gold Spike hotel.

For my last stop of the Downtown Experience, I walked down Fremont Street to The Writer’s Block, a quiet, serious, small-scale, bookstore. But not so serious that they don’t keep their fat pet bunny in the back room in a cage, and, on the day I visited, host a writer’s workshops for teens.

If you like books (I do!) and enjoy talking to hard-core readers (I do!) The Writer’s Block offers a little slice of heaven.

Downtown Project thus far

All of these Downtown Project businesses, by themselves, are worth visiting, although they are separated by emptyish city blocks and are not well integrated with one another. It’s not yet a vital urban core to the casual observer (me). But they form the outlines of a real place within Las Vegas. For a visitor to The Strip or the Fremont Experience who craves something beyond the flashing lights, I recommend each one highly.

 

Please see related posts:

Las Vegas Part I – Stock markets are like a casino, and the opposite of a casino.

Las Vegas Part III – Death by Monoculture, and Rebirth?

Las Vegas Part IV – The limited role of government in revitalization

Las Vegas Part V – Controversies and Elements of Downtown Revitalization (upcoming)

 

[1] At the Four Queens and The Golden Nugget, respectively.

[2] I read about that single person behind Eat later, as Natalie Young blogs about her struggles.

 

 

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A Leader for San Antonio: Mike Villarreal

mike_villarreal_best_candidate_for_mayor
Mike Villarreal studies the data

I have something to say about the San Antonio Mayor’s race. My friend Mike Villarreal is running and he is by far the best candidate. He supports data-driven financial policies (rather than platitudes and rhetoric), he listens and acts across party lines and for the good of the whole (not just one constituency), and he’s an SAISD dad who know how important educating the next generation is to ensure long term financial future of the city. Please bear with me a bit for a meandering story about my friend, New York City, and the movie Jerry McGuire.

san_antonio_mayoral_candidates
Unflattering picture of everyone. But you want the guy on the right

Fun with data analysis

Mike called me up one Saturday, about two years ago.

“Hey, can we meet for coffee?”

“Sure.” (Duh. I’m easy – a coffee addict.)

“I want to show you a project I’ve been working on with my laptop.”

We ordered coffee at Halcyon in the Blue Star Arts Complex. He proudly toured me through the statistical regression model he’d spent the week programming on his computer. He excitedly pointed to the results of his model, indicating pockets of properties where property taxes were higher or lower than average – statistical outliers. What if we could apply these techniques at the city, county, or state level?

When we get together with our families for lunch or dinner, my wife and Mike get into intense conversations about statistical techniques. I can follow the conversation for a short while. I get a teensy bit lost when their statistics chat turns to the z-score, chi-squareds, or p-value.

Prove your ideas

Personally, I prefer making sweeping declarations based on a few pieces of partial evidence. I’m good at that. I guess that’s why I enjoy this column-writing gig.

My wife – more of a scientist-type – accuses me of grandiose pontificating based on little data. My response to her critique (only when she’s out of earshot): “Whatever.”

But my data-oriented friend Mike also frequently (though more politely) challenges my sweeping declarations.

“I liked what you wrote in the paper, but couldn’t you get some actual data or evidence to see if you’re right or not?” he asks me.

Or, “So, how would you go about proving that?”

A mayor I admired

Speaking of public policy, I think fondly of a favorite mayor of my lifetime, Mike Bloomberg, who led New York City for eight years when my wife and I lived there.

Mike_Bloomberg_data_driven
I liked Mike Bloomberg’s disregard of political parties alot

Bloomberg was a Republican in a Democratic-dominated city. What mattered to me, however, was that he led New York for twelve years practically without reference to either party. Which is how a city should be run.

Bloomberg famously relied on data analysis and best business practices. He didn’t need to act out of ideology or loyalty to one party or another. Rather, when making decisions, he considered what worked best for the city.

Bloomberg showed that while Washington, DC stagnates with tired ideological gridlock, cities can innovate.

Why am I thinking of Bloomberg?

Mike Villarreal approaches policy as Bloomberg did. From the beginning of his campaign, Mike’s been fired up about the chance to lead the city in a non-partisan manner. “We don’t need a Democratic Party or Republican Party here, we need the Party of San Antonio” he told me last summer, when he focused one hundred percent of his efforts on running for this office.

To lead a diverse, growing, dynamic city, we need a leader who looks at all the evidence, weighs the choices, and makes the best decisions accordingly. We really don’t need a mayor who represents a limited party view, or a limited geographic base, or a limited identity.

Many talents

Beyond data-analysis, Mike has a number of talents that I admire.

I’ve watched him listen to people of all ideological stripes. He convenes alternate sides of an issue at the same table to listen to each other in search of common ground.

He takes political risks that more careful politicians would avoid, standing up to powerful forces – particularly in his own party – when it was in the public interest.

He understands first-hand the struggle of families pouring everything they have into raising children in this city. He grew here, his family did this for him, and he’s doing it for his own kids.

He’s a passionate competitor at board games, and a fired-up soccer dad.

But I guess what I admire most is his constant return to real, data-based evidence to back up policy ideas and ideals.

Antidote to cynicism

The worst thing about politics these days is our cynical belief – often borne out by experience – that our leaders make decisions based on campaign contributions, a perpetual “Show me the money!” mantra on their lips.

show_me_the_data
Mike is like the Cuba Gooding or Tom Cruise character: Show Me The Data

In a goofy way, I picture Mike in future policy meetings as a better version of the Cuba Gooding Jr. character in the movie Jerry Maguire. I picture him shouting in response to city lobbyists:

“Hey Mike, can I talk to you about my group’s housing agenda?”

“SHOW! ME! THE! DATA!”

“Excuse me, what San Antonio really needs for economic development…”

“SHOW! ME! THE! DATA!”

“Mr Mayor, the school district would like to request…”

“SHOW! ME! THE! DATA!”

OK, OK, Mike is not a yeller, so the analogy is not a perfect fit.

But if Mike Villarreal is the Cuba Gooding character for public policy, I guess that makes me the Renee Zellweger-character of financial columnists:

“Shut up. Just shut up. You had me at data-driven financial analysis.”

I know Mike will be a great Mayor for San Antonio.

Early voting begins April 27th. Please vote.

 

Please see related post from blogger, Concerned Citizen:

There’s a better choice for mayor of San Antonio – Mike Villarreal

A version of this post ran in the San Antonio Express News

 

 

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Real Estate Tax Rant

Not a lot of real agriculture  going on in this county.
Not a lot of real agriculture going on in this county.

Real-estate tax policy – incredibly important yet relatively unseen – shapes how and where we live.

I’ve ranted about estate tax policy as well as carried-interest tax policy here before, and now I’d like to rant about real-estate tax policy in my city.

As before, I don’t think it’s enough to say ‘I hate taxes,’ because taxes are a necessary evil. I don’t know about you, but I want to have adequately funded schools, parks, and public safety services.

If I have to pay taxes, however, I want to feel that everybody pays their fair share. The key to making peace with the evil of taxes is fairness. As before, I want to discuss real estate taxes in terms of what is ‘fair to me,’ and what is ‘fair to society.’

Fair to me

I recently toured (for the purposes of buying) a small fraction of a piece of undeveloped land in Southeastern Bexar County. The entire parcel of approximately 95 acres is located (for locals who care) inside the 1604 Loop, between Highways 281 and 37.

(I only looked to buy a fraction of the entire parcel, not the whole thing.)

The entire 95 acres might be worth, I don’t know, $500,000? Maybe more?

Would anyone like to guess what the 2014 taxes were for the 95 acres? Take a moment to guess.

Would you believe $170?

When I picked my jaw up off the floor I phoned the Bexar County Assessor’s office.

That’s when I learned about “Title 1-D-1” of the Texas Property Tax Code.

The 95 acres I toured are designated as a 1-D-1 ‘Agricultural Use’ – either cattle or timber. As a result Bexar County only taxes theoretical ‘agricultural income’ from that property, rather than the full ‘market value’ of the parcel.

The ‘market value’ of these 95 acres might be $500,000, but the actual ‘assessed value’ of the 95 acres is $6,780 – the estimated annual ‘agricultural value’ of the parcel.

As a prospective purchaser of a small fraction of this land, this tax code seemed very ‘fair to me.’

Fair to Society

But fair to society?

Holy cow, this is one of the least fair property tax rules I’ve ever come across.

If you own a house or any other non-agricultural property in San Antonio, you pay taxes as a percent of estimated value, typically around 2.7% of market value.

If I owned a big house in Bexar County worth say, $500,000, I should expect to pay 2.7% in taxes to the county, or $13,500 per year. Which, I don’t know about you, but seems like a lot me.

If I owned a big “1-D-1” parcel for 95 acres in Bexar County worth that same $500,000, however, I should expect to pay 2.7% of $6,780, or less than $200 in taxes per year. Which seems like very little to me.

Here’s where the unfairness hits: The “1-D-1” designations in Bexar County shift the burden of property taxes away from large landowners (like developers) and onto individual home owners.

I learned that a residential ‘market value’ property owner should expect to pay something like one hundred times more taxes than an ‘agricultural value’ property owner per year, according to Bexar County Deputy Chief Appraiser Mary Kieke.

Not about agriculture

I’m not saying I want poor farmers and poor ranchers to pay a lot more in taxes.

cowboy child
Mamas, don’t let your babies grow up to claim 1-D-1 Ag exemptions on their taxes

I can see why the State of Texas, as a whole, has decided to reward legitimate agricultural activity with favorable taxation, as a nod to its rural roots and a preservation of a certain way of life.

I don’t want to mess with that heritage. It’s not my personal gig, but I can understand the point of view.

What I am saying is that this 95-acre parcel I looked at isn’t agricultural in any real conceivable sense of the word. I mean, maybe they’ve run a couple of cows over it whenever a tax assessor is coming by? Maybe some people have cut down a few trees on the property there and reported a ‘timber use?’ I guess?

It’s land banking

Bexar County is mostly comprised of the City of San Antonio, and for the most part San Antonio has ceased to be an agricultural producer. That’s not preventing people from taking advantage of the tax code to land bank cheaply, however.

For the present owners, this parcel – as the small lots around it show – acts as a very low cost land-bank for future housing developments, either in 1-acre lots, or larger tracts.

When I expressed amazement to Appraiser Kieke, she agreed with me that “there are legitimate agricultural uses, of course, but, by and large, this [1-D-1 designation] has become a way for developers to hold land with very low taxes.”

In Bexar County

So how big is the effect in Bexar County? About $63 million per year in lost taxes.

The total difference in value between ‘agricultural’ and ‘market value’ property in Bexar County is $2,348,327,452, according to Kieke, and 2.7% of that amounts to approximately $63 million per year.

If you’re a homeowner in Bexar County you are subsidizing landowners with 1-D-1 exemptions to the tune of $63 million per year, money the county needs that has to come from your much higher homeowner appraisals.

The point here isn’t to increase tax collection by an additional $63 million. But homeowners have a very unfair deal compared to many land-banking owners with 1-D-1 exemptions in Bexar County.

 

Please see related posts

Adult conversation about tax policy

You prepare your own taxes???!!?

The good old days of taxes, 1948 edition

 

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Book Review: The Mystery Of The Invisible Hand

Looking for a last minute book to purchase this holiday season for the bright business or economics student in your life? Perhaps the student in your life appreciates mixing economic theory with murder, as in The Mystery of the Invisible Hand by Marshall Jevons.

Marshall Jevons is the pseudonym of economics professors Kenneth Elzinga of the University of Virginia and the late Trinity University economics professor William Breit.

Professor Breit was a beloved figure on campus at Trinity in San Antonio, TX before he passed away in 2011, remaining connected to students and his department in the years following his retirement.

Elzinga and Breit created the fictional murder-solving Harvard economist Henry Spearman.

Spearman – who wins the Nobel Prize in Economics at the start of this novel – applies economics principles to solve murders. Think Hercule Poirot meets Milton Friedman.

trinity_university
Trinity University in San Antonio, TX

In The Mystery of the Invisible Hand – the fourth in a series of Spearman mysteries, the economist-detective arrives as a visiting professor at Monte Vista University in San Antonio, TX – a transparent portrayal of San Antonio’s Trinity University.

Each chapter begins with a passage or quip from a famous economist.

Inside jokes of the economics profession abound – like naming a character Bruce Goolsby, a thinly disguised reference to Austan Goolsbee, Chairman of the Council of Economic Advisors under President Obama.

The humor of Breit and Elzinga shines through in their light satire of academic politics and foibles.

We meet the hard-charging Trustee Annelle Cubbage – heir to a Texas ranching fortune – who wants the best that money can buy. Cubbage wants what she wants, when she wants it. Cubbage creates the “Cubbage Visiting Nobel Professorship” that brings the Nobel Laureate Spearman to Monte Vista University.

The anxious scholar Jennifer Kim – untenured – hesitates awestruck in the face of Spearman’s awesome reputation.

Meanwhile, the art professor Michael Cavanaugh resents the high pay of his economist colleagues at Monte Vista. By his view, they lack appreciation of art for art’s sake.

Visiting artist-in-residence and painting genius Tristan Wheeler cuts a romantic swath through the hearts of Monte Vista scholars – including some professors’ wives – before his mysterious death.

Spearman observes – like a careful anthropologist of the academic world – how the seating arrangement at the Monte Vista University President’s dinner establishes the relative ranking of dinner invitees.

Elzinga and Breit clearly met all of these characters on their real life campuses during their academic careers.

San Antonio readers will appreciate the economic explanation of the cost of the Spurs’ stadium, as well as financial theories on the funding of the fictional “Travis Museum,” modeled after the SAMA.

Spearman solves the murder through an epiphany in the midst of an economics lecture at Monte Vista University, applying economic analysis to intuit the motive of the killer.

Those of you who – like me – prefer your financial and economic theories presented with a spoonful of sugar to help the medicine go down, will enjoy this murder mystery set in the Montevista neighborhood of San Antonio.

The three other Marshall Jevons economics mysteries featuring Henry Spearman are The Fatal Equilibrium, Murder at the Margin, and A Deadly Indifference.

Mystery_of_the_invisible_hand

Please see related post, All Bankers Anonymous book reviews in one place!

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Real Estate and the Efficient Market Hypothesis

Editor’s Note: A version of this appeared in the San Antonio Express News. Dignowity Hill is a historic neighborhood in San Antonio balanced precariously – for the moment – on the cusp of hipsterism, about to fall into the ‘gentrified’ category. For anyone who has strongly held opinions about gentrification, let me assure you this post has nothing to do with Dignowity Hill, or gentrification. Thank you.

dignowity_hill

My friend recently asked me what I thought about his idea of buying a small plot of land he saw for sale in Dignowity Hill, as a short-term investment. Less than $10,000.

“The East Side is getting ready to boom,” he tells me. Agreed.

“Dignowity Hill has so much charm and a ton of new investment activity nearby, with the Hays Street Bridge and Brewery, and prices will be going up.” Yup, probably.

“I like the idea of investing for a couple of years, then cashing out.” Ok, now I knew he was on the wrong track, and I told him so.

Markets are more efficient than you think

What I believe my friend did not take into account is the idea that he has hundreds – actually make that probably thousands – of competitors for that single parcel on Dignowity Hill. Those competitors mean he will not likely get a bargain.

Most middle class people, certainly most homeowners, understand the basics of real estate investing. That means hundreds of thousands of people – in San Antonio alone – have the knowledge necessary to buy that parcel, and certainly tens of thousands of people in the city have available cash to pick up a plot of land at less than $10,000.

Of those tens of thousands, I’d estimate many hundreds to a few thousand San Antonio residents actively look for real estate opportunities. I don’t think it’s unreasonable to expect that hundreds of San Antonians have seen this exact parcel, and up until now, have not made a bona fide offer to purchase it, at, or very near, the listed price.

This is not to say definitively that the parcel is a bad investment. Frankly I have no idea. I never looked at it. But I do know that markets with hundreds of potential buyers are pretty efficient at price discovery, and the parcel will not be a screaming bargain for my friend.

Will the East Side boom? Sure. Is Dignowity Hill totally cool? Yeah. Could prices double in a few years? I wouldn’t be surprised.

But the current offering price of the parcel will take into account all of these factors. Any reasonably efficient market aggregates opinions and is forward-looking – meaning my friend would have to pay now for the likely boom, the coolness, and the chance of doubling.

My entire point with this anecdote is this: although we may not see the competition in front of us, many markets are extremely efficient at reflecting all the unseen competition for investments. Real estate is less efficient than some markets, but it’s really not so inefficient that a part-time speculator like my friend will grab a great bargain.

Before concluding, I want to point out two other reasons my friend should be cautious.

Short-term time horizons

If you need to sell any investment within five years, then I don’t call that an investment, that’s something like a speculation. There’s nothing inherently wrong with speculating, only that it tends to work up until the point when it doesn’t any more, and then it ends up looking a lot like gambling in retrospect.

Real estate inefficiency

Real estate – as a speculation or as an investment – is terribly inefficient to buy and sell. Most real estate transactions require you to get an appraisal, do a title search, pay a realtor, and possibly an attorney, all of which add up quickly.

To invest $10,000 in the stock market, for example, will cost you less than $20 to do the transaction at an online discount broker. To invest $10,000 in real estate – unless you have distinct professional discounts or built-in advantages – might run you 1,000 in fees, easily.

dognowity_hill_property

I’m not saying I don’t love real estate as a long-term investment. I love real estate. Most of my non-retirement net worth comes from real estate ownership, of my home. But for small, short-term investments, I would rarely recommend real estate, much less real estate speculation.

Even in wicked cool Dignowity Hill.

 

See related posts:

Nate Silver’s 7 Levels of the Efficient Market Hypothesis

Guest post by Lars Kroijer – The Simplest Investment Approach Ever

 

 

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