Real Estate: What's Completely New, and Different From the Eighties

There are certain classic responses you will hear from people when they resist strategic ideas about the future. Let's say that you recognize a threat to your current business and suggest a course of action. One of my all-time favorite reactions you are likely to hear is:

"We tried that once in 1980s...it didn't work! So, you know, it can't work now, either."

Everything on earth, including perpetual motion machines, dividing by zero, and drinking red wine with fish was tried, to no avail during the 1980s by now-depressed executives. As a result, these jaded, weary bureaucratic warriors will attempt to shoot down anything that even smacks of an earlier attempt at greatness. Their tool of choice will be to compare the current strategic situation to the decade of neon and shoulder pads.

The way around this roadblock is a rigorous comparison of both strategic situations, today and yesterday. A non-aggressive way to handle this is to say, "Alright, it sounds like you learned a lot back then. Perhaps we could discuss how both situations compare?" Then you can go through all the things that have changed and see if you can unpack this person's assumptions about their view of the future.

*Note of caution!* Some classic strategic blunders will always apply, and should be taken mostly at face value. Pay attention when you hear, "Don't invade Afghanistan. We got the Soviets to do it in the 1980s, and it's really nasty." This one is true! They learned it in the 1980s, 1950s, 1920s, 1890s, 1120s, and so forth back to Alexander the Great. It's a good bet.

*Additional note of caution!* Getting a puppy for a studio apartment, betting on stock tips from inlaws, tattooing the name of recently-met paramours on easily-visible parts of your body - you might want to avoid these mistakes as well, with or without rigorous analysis.

Now, let's explore this technique in an economic situation rapidly unfolding before us. Many of my regular readers may be aware of the somewhat significant difficulties in the banking industry due to developments in the housing sector. (Ahem.) Everything - how do you say? - caught on fire and burned to the ground after people around the world decided that their three-bedroom ranch with a 1950s kitchen was worth EIGHTEEN MILLION DOLLARS, and then the banks developed ingenious financial instruments around this unusual state of affairs.

This you probably know. Now, if you're a consumer of national television networks and some major print publications, then you may be hearing lots of protestations about how there's never been a better time to buy! After all, we've seen it all before, especially in the boom-and-bust Eighties. (See "Scandals: Savings and Loan.") This is a perfect time to ask whether this cycle is like the 1980s, or perhaps something new that requires new analysis and several scenarios.

My hero Mish is pumping out excellent analysis of the global economy, inexplicably free, and he came up with the following list of strategic conditions that are sharply different from just a few years ago:

Tougher lending standards: no more liar loans, bigger down payments, closer look at incomes, etc.

Tougher appraisal standards

The difficulty of finding jobs

Wage and benefit cuts shrinks affordability for those who do have a job

Huge bank-owned shadow inventories

Huge developer shadow inventories, especially in condos

Consumer willingness to "walk away"

Rising delinquencies and foreclosures due to rising unemployment

Rising taxes

Overleveraged consumers

Pent-up demand to sell in a "please get me out mentality" if prices rise just a bit

The upcoming boomer retirement downsizing event

A change in consumer attitudes regarding housing as an investment

A new frugality in consumer attitudes towards debt in general

This is a textbook perfect example of how to argue for a new approach to the strategic future. Seen this real estate market before, and you know for certain it's going up? Then how do you think the overleveraging of consumers will impact the situation? What about all those empty condo towers in Florida with one family each? What about all those Boomers who were going to sell their houses anyway to move to more exciting or warmer or less busy places? What about the banks now waterlogged with houses nobody wants to buy?

You don't want to discount people's experience - it can sometimes be useful to hear of how the past can inform today's decisions. It's also acceptable to logically deconstruct the future into systems and trends (See: Future, Inc.) and to ask people if their assumptions about the future meet such demonstrably different trends at play. You may still get resistance, but at least people will be clear about where they are coming from.