Will Roger's On Real Estate
On April 13, 1930, Will Rogers uttered one of his more famous quotes, saying “out here I had been putting what little money I had in ocean frontage, for the sole reason that there was only so much of it and no more, and that they wasn't making any more”. This is the famous quote that is often paraphrased to say: “Buy land. They ain't making any more of the stuff.“
Fort Bend County investors have been taking Mr. Rogers' advice to heart. Brisk land and investment property sales activity has been due to not only a shrinking supply of quality properties, but also due to an anticipated rise in inflation and interest rates. Real estate serves as a hedge against rising inflation in periods where alternative investments offer low returns. In periods of rising inflation, people buy commodities and real estate as stores of wealth, to avoid losses expected from the declining purchasing power of money. Investors are looking for places to place their savings where the values of their investment won’t deteriorate.
Inflation is a rise in the general level of prices of goods and services over a period of time. When the general price level rises, each dollar buys fewer goods and services. Consequently, inflation reflects an erosion in the purchasing power of money. Traditional investments like equities (stocks) and bonds can be problematic during inflationary periods. The problems with bonds in a period of inflation is clear. When the value of the dollar deteriorates month after month, the income and principal payments on an investment which is denominated in those dollars is going to deteriorate at the same rate. Stocks, like bonds, also do poorly in an inflationary environment. Historically, the return on equity capital has not risen with inflation. For many years, many believed that stocks were a hedge against inflation. That proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies and their production capabilities. Stocks however, are really very similar to bonds. Many investors feel that the return on a bond is fixed, while the return on an equity investment can vary from year to year. Although that is true, the returns on equity by companies since the middle of the twentieth century have in fact not varied much at all (“Warren Buffet: How Inflation Swindles The Investor – Fortune May 2011).
Commercial property is a great alternative to these traditional investments which are susceptible to shrinking returns due to inflation and declining dollar values. Most commercial leases call for set annual rent increases, or, at a minimum, have language that will tie rental rate increases to the increases in the consumer price index (CPI). The CPI is basically is a measure of the annual rate inflation as it measures the annual increase in the cost of a “basket of goods and services” in the US (both nationally and by region).
Planned development in Ft Bend County has created our own version of Will Rogers' “ocean frontage”. There is “only so much of it and no more”. I have witnessed our land values steadily increase as the county has seen record levels of development over the past twenty years. As our supply of property in our most attractive areas has been absorbed, prices have risen accordingly. I hope I have the opportunity to see what the next twenty years will bring.