Planning to invest in Real Estate? Watch out the market hasn't bottomed out yet!

I came across this interesting graph on index of American home prices for the last 120 yrs that was originally produced by Professor Robert J Shiller and later updated by a reader and posted at Shiller had initially come up with this analysis as part of his book 'Irrational Exuberance'. The magnitude of the rise in housing values during this boom cycle was in excess of 100%, that too within a short span on 6-8yrs. In some of the hot markets like Florida, California, Nevada etc the price increase was much higher than the national average. No wonder the fall has been equally dramatic! Comparing this with the previous boom/bust cycles puts lot of things in context and brings out the magnitude of the bubble. As you can see from the chart, while the real estate prices has come down by a significant margin in the last couple of years, we are still at the mid-point and have a long way to go before the markets bottoms out.

Note: The above chart is an adaptation of the classic Shiller housing price chart with updated data. The original graphic is via NY Times.

Here is another interesting graph from Reggie Middleton's boom bust blog. The below graph is an extrapolation of the Robert Shiller's analysis in comparison with interest rates, population growth, building costs etc and it highlights at what point the market is expected to bottom out. As you can see from the below graph, the interest rates and building costs came down during the 80's and 90's, setting the stage for this historic boom. Another interesting statistic to note is that, the last time the housing crash happened back around 1920 it took almost 25 yrs for the market to recover!


One of the important parameters to consider for market recovery is the foreclosure rates. So far the housing bubble has led to foreclosure of around 2.3 million homes. In 2009, with all the economic issues and lay-off's that are happening, this trend is expected to accelerate further leading to foreclosure of around 2.4 million more homes. Looking at a longer term, around 8.1 million homeowners are expected to lose their homes by 2012. So we are in for a prolonged real estate downturn. If you are planning to invest on a home, wait and watch for another year or two before you take the plunge!

For those interested in reading more you could check out the below links:

United States Housing bubble
Causes of the United States Housing Bubble
No Ceiling yet on Home Losses: Report: Expect 8.1 Million Foreclosures by 2010

How to Survive the Economic Downturn?

I was reading an interesting case study in HBR blogs couple of days back. The case study was about a Home improvement store chain whose sales/profits were going down. The company was faced with a tough decision to cut costs in order to survive. Headcount reduction seemed to be the only course of action. The author lays out the various thoughts of the company's leadership team and employees and asks for our opinion on what is the best course of action.

This seems to be a pretty common occurrence these days with lot of companies facing similar situation. Economic downturns & recessions are an inherent part of capitalism intended to shake up the market and weed out the weak companies. It’s all about survival of the fittest. Companies can either become stronger or weaker based on their response to the crisis and the actions take take during these tough conditions. As part of this blog I've attempted to list down the possible solutions they can adopt to survive and thrive in the downturn. These solutions typically fall under three major categories which are:

Optimization & Cost reduction solutions
These solutions are aimed at reducing wastage in the system and costs.

Solutions for fixing issues/Problems
These solutions are aimed at identifying the root-cause for sales/profit decline & fixing them.

Growth enabling solutions
These solutions are aimed at improving the competitive advantage of companies and enabling them to come out ahead of their competition.

There is no single solution that will fix the issue. Companies need to undertake a combination of all the three major solution categories listed above in order to sustain & emerge stronger from the downturn. Here are top 10 solutions that companies could adopt during tough market conditions:

1. Eliminate excess fluff

Most large organizations as part of their growth create lot of redundant roles, position and non-critical functions. All the roles and functions that are non-critical need to be reviewed and pruned down as appropriate. In addition for each of the functions we need to analyze if there are ways and means in which productivity could be improved thru automation etc and if it can be performed with reduced effort. If feasible some of the people displaced thru this reorganization should be re-trained and deployed in core functions. Companies could also explore options like outsourcing their manufacturing, services etc to low cost locations to reduce cost.

2. Weed out the non-performers

In most environments non-performers are a big drag on the system. They generally are very negative and low on morale. Not only is their productivity impacted they also impact the morale of the good people in the system. Identify the bottom x% of non-performers and weed them out of the system.

3. Reduce Wastage

Wastage of resources is a big drain on enterprises. In normal working conditions these go unnoticed. This is good time to ‘go green’ and reduce wastages in the system. Some of the examples of reducing wastage include – Utilize power saving techniques, Encourage Paper-less office (reduce consumables usage), Reduce T&E expenses (utilize collaboration tools, video-conferences etc), Optimize supply chain (Just in Time, low inventory etc).

4. Renegotiate contract with Suppliers/Vendors

This is a good time to relook at the contracts with your suppliers and see if some of the rates can be renegotiated. Most enterprises get into multi-year contracts with vendors/suppliers and are stuck with the high rates thru the conract. These rates would have looked attractive at the time of signing contracts however due to market pressures they could have reduced later. As an example during the early-mid 2000’s companies that had multi-year contract with telecom service providers realized that as an outcome of dot com burst telecom prices came crashing down due to huge availability of bandwidth however lot of companies were still stuck with old pricing. Some of them pushed their carriers to revise the pricing based on current market conditions.

5. Identify reasons for fall in sales and fix it

This is one of the most important activities that a company needs to do. In a lot of cases companies attribute fall in sales to macro economic conditions and dismiss it. A good indicator for this would be to check how your company is performing its industry and some of its key competitors. If the company sales is falling more than its competition it’s an indicator for a problem. Some of the reasons that could impact sales include Product quality, Customer service, Differentiation, Market perception of the company/product, Cost etc. A detailed root-cause analysis needs to be done to identify the problems and appropriate action items need to be taken to fix it.

6. Identify loss making division/products and fix them

In a lot of cases there might be specific products/divisions in the company that might be pulling down the whole company. Identify the non-performing divisions/products and fix them. In case some of these are non-core to the company it may be divest them. It also makes sense to run each of these products/divisions as separate profit centers.

7. Identify what’s core to your company and focus on it

One of the foremost strategies recommended during downturn is to focus on core operations of the company. Over course of time companies tend to deviate off their core offerings and venture into multiple areas. Companies need to clearly identify what is core to their operations and stick to it. In order to be successful they need to have razor sharp focus on their core operations and continuously invest in it to stay ahead of the field. All non-core operations could be spun-off and divested from the company. This would also help to generate much needed cash for running the core operations.

8. Improve differentiation against competition

In order for enterprises to be successful they need to successfully differentiate against competition. Companies need to constantly ask themselves the question - why would customers want to buy their products/services? They should identify unique value proposition that customers would get by engaging the company. Differentiation can be in terms of superior service, Higher quality, Unique features, Customer experience, Better value for cost etc.

9. Invest in Innovation and research

Innovation is a necessity in order to drive sustained growth and market domination over the long term. Companies need to be aggressive and encourage innovation and invest in research to help develop new products and new ways for delivering services to customers. Innovation could also help with operations more efficient thereby driving down cost/Time to Market etc. As an example companies like Google, Amazon, Ebay, Facebook etc kept their focus and invested in innovation and research during the dot com bust and have emerged as the industry leaders today. Similarly American car manufacturers are in the brink of collapse today as they did not innovate for the last few decades.

10. Invest in talent

Challenging market conditions are the best time to hire the top talent in the market. Lot of good talent will be available in the market due to lay-off, company closures etc during challenging times. Successful companies are constantly on the look-out and hire the best talent in the market during challenging times.

I have made the above list generic so that it will fit a wide range of Industries. Pls let me know your views on the above solutions. If you feel that there are other ideas in addition to the ones i have listed above pls feel free to add to this list.

Credit Crisis demystified by Jonathan Jarvis

Here's an excellent educational video on the credit crisis by Jonathan Jarvis. The video explains how the whole mortgage & credit system works and what went wrong with the system leading us to the present crisis. This is a "must watch" video for folks who are closely following the credit/economic crisis and wondering how this all happened and why no one has caught this earlier.

I loved the way Jonathan has demystified this complex issue and presented it in such a simple and entertaining way. I've spent countless hours reading up numerous articles/blogs & discussing with my friends in financial world to understand the credit crisis, This is the best and simplest explanation I've seen till date. Hope you like it:-)

For those interested in reading more, here's an stirring article from Orin Woodward on why government shouldn't get involved in this credit crisis and use taxpayers money to bailout banks. He says that this is creative destruction and this would help us evolve much stronger from this crisis. While I do agree with Orrin's reasoning, Govt sitting back and letting things take its own course is definitely not an option given the current recessionary conditions & scale of this crisis. Some of the banks/bankers who were the prime reason for this crisis might stand to gain from this Govt intervention, that cannot be prevented and its part of the deal. The risk of Govt not intervening and letting the country/world go into prolonged depression is way too high. It is going to be more expensive to clean up later and people will have to go through more pains (similar to 1929 depression) before we get the system back on track.

The real crisis? We stopped being wise - Barry Schwartz's speech at TED

This is an excellent speech by Barry Schwartz at TED 2009. In this speech he says that the real crisis we are facing is our loss of wisdom. He talks about the importance of values, virtues etc and says that putting rules and more rules is not the solution. He also says that virtues cannot be taught at school nor can be put as an instruction sheet, it needs to be practiced by people and imbibed as part of our values.

This seems to echo my thoughts on one of my earlier blogs regarding the ethical/moral crisis reg Sathyam.

There are some excellent speeches published in TED website. You could check them out if you are interested.

How Twitter changed my life!

I came across this excellent presentation on Twitter and how to use it. Just wanted to share it with you folks. For those of you who dont know about Twitter its a micro blogging service where you share updates with your friends/followers on key happenings/updates in your life.

Personally in my case i started using Twitter close to 3 months back. Initially I was not sure how to use it & didn't see much value in it. However over the last couple of months I've really started to love twitter. The key is picking the right set of people to follow and start interacting regularly with your network. Quantity doesn't matter, quality does else you will get overwhelmed with junk.

Twitter has helped me build a good social network and interact with them in a meaningful way in addition to increasing the quality of my browsing time. One word of caution of using Twitter though, it can be pretty addictive and will eat away your time if you don't do good time management. Here again you don't need to browse all tweets, instead pick the tweets you want to read & respond back. If you try to read everything that comes your way it will overwhelm you. You might also want to use tools like tweetdeck, twhirl etc to organize and browse your tweets.

Here's another good video about Twitter.

Twitter in Plain English from leelefever on Vimeo.

For those who are in Twitter you can follow me - @Shogun1947. For those who are not yet in Twitter you might want to get started quickly and start building your social network!

Future of Newspapers

Who said anything about newspapers being history!! Here's an interesting discussion on future of newspapers by Charlie Rose - Award winning show featured in PBS. Key participants in this conversation are industry bigshots like Walter Isaacson of "Time," Robert Thomson of "Wall Street Journal" and Mort Zuckerman of "The New York Daily News".

The discussion talks about the need for newspapers to re-invent themselves to survive in this internet world where news is delivered free in net. Its covers interesting topics like micro-payments, Delivering premium content through Kindle/eReaders, All color newspapers etc. Overall they are concluding that online will not replace traditional print versions, instead it will augment it.

If you like this you might also want to check out the following article:

How to save your newspaper by Walter Isaacson

Layoff by Profitable Companies - Is it Ethical?

Jan 2009 has been a bad month for US with around 598k jobs being laid off. This is on top of the 2.3M layoffs in 2008. One of the trends that we saw during this cycle was lay-offs by profitable companies like Microsoft, IBM, Intel etc. This garnered a lot of press coverage and prompted a big debate on whether layoff's by profitable companies is ethical.

IMHO layoff by profitable companies is ETHICAL. Here's are some of the reasons why i feel it is ethical:
  • Shedding excess baggage: Most large companies over a period of time build up a lot of fluff (redundant positions, over staffing etc) in their operations and this typically goes unnoticed when they are growing well and are profitable. When the going gets tough and margins are starting to take a hit they wake up shed lot of these excess baggage, trim down their operations in order to be more efficient & competitive.
  • Rollback of excess hiring for anticipated growth: It normally takes between 6-12 months to induct a new employee and have him fully productive in a typical enterprise. Lot of companies do anticipatory hiring based on their targeted growth. When a downturn occurs, most companies realize that a slowdown is occurring only when they start feeling the pinch. When growth suddenly starts tapering out and they don't have sufficient work for the folks that were hired ahead of time. Hence leading to lay-offs.
  • Declining Demand/Consumption: One of the key reasons for economic slowdown is decline in consumption. People tend to spend lesser due to risks/tough market conditions and this leads to worsening of the condition. A lot of industries take a hit due to reduced consumption/demand. Its only natural that they reduce operating expenses(shutdown factories, layoff workers etc) to remain profitable.
  • Weeding out the Non-Performers: Weeding out the bottom x% of non-performers is a standard practice in most enterprises. When the going is good the tolerance level in the system is higher and non-performers get more leeway and lesser folks are laid off. Non-performance related lay-offs also get very little attention/coverage. During difficult times, companies utilize this opportunity for flushing out the non-performers. In most Fortune 500 companies the bottom 2-3% itself can be sizable(few thousands). This whole process also gets more press coverage in tough market conditions.
  • Protecting share holder interests: One of the key agenda's for boards and CEO's is to maximize shareholder value. These days there is an enormous amount of scrutiny on company performance, operational metrics, profitability etc more so when the going gets tough. We as share holders & individuals also demand better performance and improved value from corporates. Due to this boards and CEO's take a very conservative & precautionary approach during tough economic conditions to optimize their operations, reduce costs and minimize risks. If boards/CEO doesn't take these tough decisions they will be replaced with folks that can take these decisions.
In most cases lay-offs are done due to a combination of one or more of the above factors and hence it is ethical. Pls let me know your views on the same. Also if you feel there are other factors in addition to the ones listed above pls feel free to add to the above.

The World is Flat - Thomas Friedman's Keynote address at MIT

This is great Keynote lecture by Thomas Friedman - author of New York Times bestseller 'The world is flat' at MIT in Nov 2007. In this keynote he provides a high level summary on his book, talks about some of the flattening agents and finally gives us a preview of this new book that got released last summer 'Hot, Flat and Crowded'.

For those who haven't read 'The World is Flat', Its an excellent book that provides lot of thought leadership on globalization and how it is shaping the world. I would highly recommend you to read this.

For those who wants to download this to your IPOD here's the link

Book Review: The Age of Turbulence

Alan Greenspan is one of the greatest economists of our time. He was the US Federal Reserve chairman from 1987- 2006 during one of the longest bull markets in history and was a leading free-markets supporter. In this book he narrates his views, thoughts and experiences on the key economic events that shaped US & global economy for more than 6 decades!

The first half of the book talks about his learning as an economist and also about some of the key economic concepts. He starts off with his experience of 911 crisis and Federal Reserve's role in immediate aftermath. Subsequently he covers about his childhood, how he became an economist and his career progression first as an economist and then in the political world at Washington DC. He delves into some of the key economic events in the last 50 yrs like Recession in the early 80's, Black Monday - '87 stock market crash, End of Cold war/communism, Dot com boom and subsequent crash etc. In the first half he attempts to take the reader through his learning on how economy functions. In some places he gets little technical, it took me few re-reads to get some of the concepts and few were beyond me even after multiple reads :-)

The second half of the book talks about his views on the emerging global economy. What are the forces & factors shaping the new economic model of the world. He covers a wide range of topics like globalization and its impact, Energy and its relation to global economy, Rise of some of the developing economies - China, Russia, India etc, shifts in the world demographics and how it will affect the global power equation etc. He gives a fairly detailed assessment on the above topics. He finishes off the book with his predictions on where the world economy is headed in 2030 and beyond. Alan Greenspan's support for free markets and capitalism and his belief in the self-healing power of free markets has been the anchor for all policy decisions during his long career and it comes out pretty strongly across the entire book.

Overall this was a good read and very informative book. It provides an excellent overview on high level workings on the economy and some of the key economic events of the last century. I would recommend this book for folks that are interested in knowing about economy and how it functions. If economy, capitalism is the last thing in your mind this is not your book :-(

This book has spurred my interest in capitalism, economy and free markets. As a follow up from this I'm planning to read 'Wealth of Nations' by Adam smith!
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