The Economy is Not THAT Bad!

I am not a trained “economist” and I don’t even play one on TV.

Nonetheless, I am interested in economics, have done some study of the “Austrian School,” and consider myself economically self-aware.While this economic sentence on my part wouldn’t earn me a degree at a “real” university, I think I’ve become pretty good at identifying indicators that tell me something about the current state of the economy.

For example, my wife and I used to like to drive around our small suburban town, looking at houses for sale. One summer, as many as one out of every five houses had a “For Sale” sign in the yard and we had to drive sometimes for ten or fifteen minutes to find the one house in ten for sale that wasn’t already marked, “Sold.”

From this I concluded that there were more qualified buyers than sellers, and that houses were selling well.

During the next season, there were an equal number of houses for sale but it took that same ten to fifteen minute drive to find the one house in ten that was marked, “Sold.”

From this I concluded there were more people wanting to sell their houses than there were willing and qualified buyers to buy them, and that houses weren’t selling that well.

Examining the apparent trend, it would seem that there had been a change, and something Uncle Alan “Greenspeak” Greenspan would probably describe as a “reciprocal vectoring of the velocity of the market” having occurred (or some such incomprehensible gibberish).

My simple minded, economically uneducated self would say we’d gone from a growing economy to a shrinking economy or, in language my grandparents would understand, “We’re going from good times to bad times.”

In July of 2008, I took a drive through the “Lakes” region of Minnesota, the “Land of 10,000 Lakes” where fishing and boating are the king of summertime activities, and indeed a way of life for many. When I drove through the buckle of the “fishing belt” and saw about half of the boats for sale, and most of them still under their Winter covers in July, I concluded that if people in Northern Minnesota were trying to sell their fishing boats at the peak of the fishing season, they must need the money.

My observation of these and other anecdotal trends led me to conclude that the economic downturn long-predicted by the “honest money” crowd I hang with was getting underway.

This occurred at the same time I had been watching lots of my neighbors lose the race to the bottom of the real estate market because they had a fundamental misunderstanding of the concept of “market price.” It seems most people think that “market value” is either the last price mocked up by the appraiser working for the bank wanting to give them a home-equity loan, or it is the highest price for which a comparable house has ever sold in their neighborhood.

This is either wishful thinking on their part or “needful thinking” because in order for their current “plans” to work, this mental construct of “X” price for the house is necessary.

You see the same concept with real estate agents “predicting” the turnaround of the economy and the market “next year” which is a prediction based on nothing more than simple necessity. In order for their current career/lifestyle/self concept to survive, the economy simply MUST turn around by next year. More wishful thinking…

The seller who misunderstands the market will insist on a price too high. They’ll have a house that once sold for $250,000 and they will not let it go for less than that. It might sell at that point at $225,000 but they’ll never get an offer because their asking price is too high. Six or twelve months after they put it on the market and only three people have looked at it, with none making an offer, they reluctantly agree to price it “below market” (the market in their mind) and reduce the price to $239,000.

In a declining market, they may now have overpriced the house by the exact same amount because the realistic market price is $214,000. The “market price” of any object is not some number written down by an appraiser 24 months ago. Rather, it is what you can get a willing buyer to pay for it TODAY.

People who don’t recognize that they are chasing the market are in real danger of chasing it down so far that they can’t sell the house at all at a price allowing them to pay off the mortgage. While they could have sold it for $225,000 when they first put in on the market, two years later they’d be lucky to get $200,000 and if they owe $210,000, we see yet another family walking away from their home and their mortgage.

The reason I think the economy is “not that bad” yet is because we have not reached the stage where we see the widespread practice of people selling their homes for the deep discounts necessary to attract a buyer and they are still unrealistic about the “value” of their luxury items like boats.

If you bought a new boat off the showroom floor in 2007 for $23,000, even in a strong economy it’s not realistic to expect to get $19,500 for it in the fall of 2009. In a shrinking economy where 80% of your neighbors are trying to sell their boat, you’d better have a pretty competitive price if you expect to sell. If you really need to get out from under the payment but have resolved not to “take a bath” on it, you could easily find yourself “under water” (a bad place to be in any item but especially bad in a boat!) owing more on the boat than you can expect to receive in the proceeds of a sale.

Home owners, boat owners, RV owners, et al who are not realistic about the changes in the market (and to make it clear, when the economy is going bad and people are losing their jobs, MARKET PRICES GO DOWN), risk going upside down, being forced to walk away, and getting nothing.

The latest “indicator” that the economy is not that bad came to me in the process of re-creating this website. I used the ol’ “Doctor I have a friend with a problem” story and posted on http://www.goldismoney.info (GIM) looking for freelance web developers, with a short description of what was needed and a promise to send details to anyone who responded with a personal message.

I got some nice public replies and recommendations, as is common on GIM, along with a suggestion that my description of a “reasonably computer literate middle aged guy” who would be running the website was “the kiss of death” because the writer was certain that the owner of the website would waste the developer’s time with questions and problems. Overall, there was friendly encouragement and I received six personal message (PM) replies, one of which included an e-mail address of a “young” guy who was “really good and could use the work.”

To each of the respondents, I sent a two page description of the website I wanted built and a confession that the work was for me. To my surprise, only one of the respondents even acknowledged receiving my “specification” and he expressed some surprise at how well I had described what I wanted. The others I never heard from again.

This surprised me because I know the population of this web forum to be capable, intelligent, entrepreneurial, and (I assumed) interested in finding work. Here I was looking for someone to do some part-time work and I couldn’t stir up very much interest!

Following up with the one interested respondent, I found myself in contact with the Vice President of Sales and Marketing for a small software development company in Michigan, with an affiliate company in India. He connected me with a web developer in their affiliate company in India, and this very personable and responsible professional helped put together this site.

And he did it for a very reasonable price.The inevitable flames that will come my way for “outsourcing” are undeserved. It’s not that I got several offers from North American firms and I chose the Indian firm because it was less expensive. I advertised on a public forum, sent out six RFQ’s (request for quotation), and I ended up going with the only individual/firm who responded. As far as I knew, I had sent all the RFQ’s to North America.But the guy who ended up doing the work happened to be in India.

I concluded from this experience that the Indian company wanted my business more than any of the freelance developers on GIM.

And from that I concluded the economy in North America is not that bad.

And he did it for a very reasonable price.

The inevitable flames that will come my way for “outsourcing” are undeserved. It’s not that I got several offers from North American firms and I chose the Indian firm because it was less expensive. I advertised on a public forum, sent out six RFQ’s (request for quotation), and I ended up going with the only individual/firm who responded. As far as I knew, I had sent all the RFQ’s to North America.But the guy who ended up doing the work happened to be in India.

I concluded from this experience that the Indian company wanted my business more than any of the freelance developers on GIM.And from that I concluded the economy in North America is not that bad.

Thanks for reading!

Postscript:The American company is Saras America (http://www.sarasamerica.com) and their VP Sales is Mr. Steven Scruggs.

The Indian company is Saras India (http://www.sarasindia.com) and the VP of Development I dealt with was a real gentleman by the name of T Sirish Kumar. Sirish really went “above and beyond the call” in helping me get going with this web site.