This article is about risk faced by the U.S. Economy due to threats of relocation to optimal work locations outside the US. In particular, it discusses a latent pricing inefficiency within residential real estate.
Let me ask you a question. Where does most real estate value come from? Of course, location. But let's be more specific. What is the primary component bringing value to a location? Is it:
- school district
- the weather
- or community
No. These things are important and primary for some buyers -- but in general decisions follow the advantages of the local economy. Jobs allow workers to move to places.
I might love all 5 things listed above, but if I can't make money, and I don't have plenty money already, then chances are I'm not buying a house in this neighborhood. I'm going to go where the jobs are, and this location's real estate value is going to react upwards from my demand -- even if I'm renting. I'm probably not even going to consider the relative cost of living.
There's a problem: people rarely consider that the primary asset they are paying for is the local job market. Case in point: Silicon Valley's vibrant real estate market, and conventional media coverage of it. We see a focus on an increase in demand, expectation of appreciating prices, and a brief mention of the fact that people have money.
It's a little backwards. If we didn't sleep through 2008, we saw how demand follows money. But it's not just that people have money -- they're buying real estate because it will help them earn more. ROI.
We all understand this, but it's not something we focus on. Why should we? Who knows where the jobs are going to be in the future? If a local economy as progressive as Silicon Valley still requires many to reside physically, doesn't that mean we're all fairly safe in our local economies?
That depends on how you draw your asset classes. It's ultimately a question of mean reversion. But we're ignoring this. Think about the way Americans think about international real estate.
To us, we look at it in terms of "growth". We think, these guys aren't as far along as us, so maybe it's a better investment to fund their growth, because there's more room for appreciation. We can get a few extra points on top of our index or basket over the years if we make it a bit more international. But we other these "emerging markets". Their economies are not ours and do not threaten ours.
Hard to believe, right? "Made in China" taught us we don't have a monopoly on exports. But in real estate thinking, most assume a monopoly in local economies. Even if you aren't one of those assuming it, you're probably paying extra for the general assumption that bids up prices.
Passivity does not mean neutrality. Everybody is allocating her asset classes even if it's: all cash in a checking account, coupled with intangibles like a certificate in dental hygiene. So the real question is, to what extent does a "mean" exist for American real estate to revert to?
Let me assert upfront this is not just about the information technology and customer-service-call-center professions. Let's think about every profession: service, research, financial, physical. Let me point out that statistically United States students are no longer particularly exceptional in anything beyond "confidence" and perhaps "creativity".
Let me ask whether scaled hyper-specialization (the continuation of division of a secular trend in labor, reaching back all the way to the shift from hunting and gathering to farming) is rendering the credential model of the late 1900's obsolete. Let me conjecture that we're headed to an economy of niches, inter-disciplines, freelancing, risk compartmentalizing, and general re-dimension-ing. Computers keep getting cheaper. Also, the world is learning working English.
Tell me that unnecessary dimensions of scarcity are not slowly but strictly flattening. Try to tell me. You won't do it. You know better.
While Silicon Valley is showing that local job markets still do matter, it also highlights the extent to which all local job markets bid up value. If international economies are successfully integrating the basic models of capitalism and capitalism's variants, there will be mean reversion.
So the growth story in international is not about a few points extra when you buy international ETFs. For most Americans, who have more than substantial wealth sunk into residential real estate, it's also about to what extent workers' bidding on your neighbors' houses will or will not be outpaced by workers' bidding on houses in Brazil.
Even if you're "retired", the proletariat bidding up your neighbors' house is not. Every day that you hold your house, you're making a bet on that proletariat bidder pool not evaporating.
What happens when they can do their jobs remotely? Do they stick around for the school district, weather, safety, beauty, and community? Or do they pocket the hundreds of thousands of dollars in savings on real estate (and other goods), and relocate to the majestic mountains of Vietnam?
Where does the labor economy in Silicon Valley come from? Barriers to entry in terms of tech companies hosting labor elsewhere. How sustainable are those barriers in most other professions? How many of these professions already rely on the majority of labor being performed in isolation? To what extent will iterations like Glass bring new windows connecting people in real time across disparate geographies?
I'm not saying America will stop manufacturing (read Liveris). But what happens when the rest of the world continues to manufacture more than it does already? Okay, what happens when America is no longer the only place where people innovate? What happens when consultants are sought from other countries as well? Yeah, it has happened already, but not to any extent indicating saturation.
You know arbitrage regulates market inefficiencies. How efficient is it that people pay 10-20x extra to reside in the United States, and commute to work to sit in offices, communicating with people down the hall using email?
Consider the implications of mean reversion. The US has had quite an appreciative couple centuries. It's probably time to consider re-balancing on that time horizon. It's probably time to start winding down exposure to the superiority of the American job market. You're probably passively overexposed to US real estate -- so you're not neutral.
By the way, how do Realtors add value in terms of location? They "help" buyers focus on the following:
- school district
- the weather
- what a great bargain buying the "dip" in US real estate!
Oh and, before you tell me about intolerable political risk in second and third-world countries, explain a few things to me. Explain to me why even progressives such as myself see Legislator In Chief Obama's brute-force assault on our judicial firewall as inappropriate. Explain to me why half the country is unsure of whether a prosecutable felony took place in Florida when a non-cop killed someone in the manner of a more than negligent cop. And explain how our indulgently violent treatment of criminality signals the merits of general American peace-maintaining capacity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.