"Tear-down Index" Up

Tear-down Activity Belies Recession Signals

Yes, the Case-Schiller real estate index just showed a record drop, and yes, consumer sentiment as reported by national gauges remains low. And investors don't need to be told that the stock market remains highly volatile, and down sharply so far for 2008.

However, under the category "all real estate is local," tear-down activity near the City Lakes appears to be at a record high.

I'm personally aware of at least six projects at various stages of completion within one mile of Cedar Lake in Minneapolis. I'd estimate that the market value of the homes under construction ranges from $1.5M to more than $4M (check out the spectacular home going up on the west side of Lake of the Isles!).

Counting major rehabs -- defined as more than $250k -- swells the number of in-progress projects to about a dozen in the same area.

Aren't we supposed to be in a kind-of-recession?

It is a bit perplexing. The bullish explanation is that people may be pessimistic short-term, but are optimistic long-term. If you are building a $3M home near Cedar Lake for yourself (vs. "spec," or resale), you undoubtedly are thinking long-term.

The other possibility is that at least some of this activity is defensive: when markets are volatile, people want their money close to home -- literally. You can't live in your stock portfolio, and, given the U.S. budget deficit, higher taxes on everything from capital gains to earned income may be in the offing. However, mortgage interest for most people is subsidized by the government (via itemized tax deductions).

There may also be a "buy low, sell high" phenomenon at work, at least with respect to contractors. With new construction off sharply and the overall economy slow, now is a great time to interview and hire people in the building trades (electricians, carpenters, etc.).