Appraisals for Energy and Economy

Economists believe that the housing bubble of 2008 burst for two reasons:  mortgage brokers who convinced underqualified buyers that they could buy more, and buyers who wouldn’t accept that they were underqualified.  Although these two points are not arguable we forget one of the most highly trusted participants in the equation – the Appraisors.  It is the Appraisor who convinced the Buyer and the Broker that the value of the house was fair and sustainable.  Because of the work of the Appraisors, millions of houses are encumbered by loans larger than the value of the homes. 

The appraised value of any house is established by the most recent sale price of a similar house.  So as prices of houses rise, the appraisal system allows prices to continue to rise until the bubble bursts.  As the houses are then sold at lower prices in a dead market, the prices continue to fall.  Consequently, home prices rise and fall at such great percentages that home owners lose billions in the swing.   In the period from 2008 to 2011 the value of used houses plummeted 30-40%, but the cost of new construction only declined 8-12%.  Consequently, the buyers of used houses suffered a much greater loss than the buyers of new homes.  The current appraisal system supports this trend.

Moreover, a home owner who invests the time and money to renovate their older home to a new standard will never get a return on the investment because the renovated home cannot be compared to another like kind sale.  The older home upgraded to the new standard is a sure loss if the rest of the neighborhood does not do the same.  Herein lies the flaw.  Old neighborhoods stay inefficient and ill repaired while new homes are constantly improved with better design.  Because the new homes are better designed they retain their value longer - even through an economic crash.

What would happen if appraisals were based on the reasonable cost of a new energy and water efficient home with modern ammenities, yet keeping its original size, architecture, and location?  For instance, if a home is 20 years old, what would it cost to renovate it to the new standard?  Compare this to the cost to raze the house and rebuild to a new standard.  The difference is the net value of the house.  Of course the cost of the lot is assessed separately.

We can call this the New Standard Equivalent.  The qualified buyer must be a person who can purchase the house for the net value and also has the financial ability to upgrade the property to the New Standard Equivalent.  With the New Standard Equivalent, old neighborhoods get upgraded, slums get repaired, old houses become more energy and water efficient, and urban renewal becomes automatic.  Only the seller who fails to upgrade will feel the pain when it is time to sell.  Buildings become more efficient, jobs are created, and investment risk is reduced.

The EPA reports that buildings consume 70% of the electrical energy and 37% of the total energy produced in the US.  It is also reported that new buildings are 30% more efficient than buildings 20 years older.  Yet there is no current way to incentivize the upgrading of older buildings to a higher standard.  By modifying the appraisal process to a New Standard Equivalent, this becomes a matter of economics and good investment sense.  Property values are maintained, construction jobs are increased, and energy is saved.

The Great Exuberance

We currently live in a period referred to by many as “The Great Recession”.  After the fall of 2008, the economy hit a point from which it has not yet recovered.  We begrudgingly wait for the moment where we can safely get back to the way of life we once knew.  But I predict that twenty years from now we will not look back on this period as a Great Recession at all.  The fact is that we enjoyed a period of great excess in the decade prior to 2008.  Alan Greenspan referred to the period from 1996 to 2006 as one of “irrational exuberance”.  Now, in 2011, we live in a more normal economy.  This is not the Great Recession.  It is the end of the Great Exuberance.

Unemployment is the relationship between the people who are seeking jobs, and the number who are actually employed.  Right now it appears unemployment is high because a larger percentage of people are seeking jobs than ever before.  In U.S. history prior to 1980, more than half of the American population did not work, nor did they seek jobs.  I am referring to the children, the elderly, the ill, the students, the unemployable, and the home parents.  According to the USDept. of Labor, the US workforce averaged around 40% from 1950 to 1970.  It then climbed briskly to an all time high of 50+% during the Exuberance, and this over employment was reflected in lower work ethic, lower customer service, and lower production per worker.  Now that the workforce is declining back to a more sustainable 49% we think we are in a depressed economy.  Yet many of us look back on the 1950-1970 period as a time of relative stability and comfort despite the fact that true unemployment per capita was 10% higher back then!  People valued their jobs.  They worked harder, served better, and produced more.

Not only did we over employ ourselves during the Exuberance, we also over spent.  We over spent our time away from our children.  We over spent on our children.  We over spent on our pets, our cars, and our gadgets.  We bought over priced, over sized homes with practically no money down.  And we filled our credit cards to the max in anticipation of the next inevitable pay raise.  Average credit card debt reached $5,500 per card in 2009, and has come down only a bit as a result of the Great Correction to a slightly more modest $4,700 per card.  The economy of the Great Exuberance could only be maintained through excess consumerism.

We weren’t the only ones who overspent though.  The US government did the same thing.  In the Exuberance, the US government enjoyed record income from taxation, and they spent significantly more than they received.  Our government created a greater national debt during and shortly after the Exuberance than since World War II.  This was propogated by both Republicans and Democrats alike.  The national debt has now exceeded the GDP for only the second time in U.S. history.  In fact, our government continues to grow debt in the hope that they can recover the economy and get back to the Great Exuberance.

The message here is that we need to stop crying over the economy and get accustomed to it.  This is the normal economy folks.  We once lived in a balloon and the balloon has popped.  The economy will no longer guarantee us a job, or a house, or a 401K.  We need to earn those things through hard work, creativity, and money management.  We need to cut back and save, because we cannot afford and should not have an economy like the Exuberance.  If you are thinking of buying something in anticipation of your next big raise you shouldn't buy it.  And, if you are waiting for a return of the Great Exuberance you will surely be disappointed.

Natural gas - invisible renewable

For the longest time I thought natural gas was a fossil fuel that would eventually be depleted.  This would be unfortunate because it is the cleanest fossil fuel around.  Many of our coal burning power plants are now switching to natural gas as a cleaner solution, and the conversion of vehicles to CNG (compressed natural gas) reduces tailpipe emissions by more than 21%.

Then I discovered that natural gas is refined methane gas.  Methane is formed in landfills, sewage systems, and farms; and all of it can be captured and sold as fuel.  Unfortunately, much of the methane we generate is lost to the atmosphere where it behaves as a powerful greenhouse gas.  This is important to know when we consider that the largest single U.S. source of methane emission is the natural gas system itself!  All of these wells, processors, and pipelines offer endless opportunities for leaks.  We would never settle for leaky oil pipes, so we should set the same standards for leaky gas systems.  Invisible or not, natural gas leaks still impact the environment.

The capture of methane is considered by the EPA to be possibly the greatest opportunity to cut greenhouse gases.  Methane is 25 times more potent than carbon dioxide as a greenhouse gas, and it has only 1/8^th of the atmospheric lifespan (12 years as compared to CO2’s 100 years).  Consequently, a significant cut in carbon dioxide emission would not be felt for a century while a significant cut in methane would show results in just over a decade.  Moreover, methane is a commodity that provides an incentive for capture, but reduction of CO2 results in cost increases.  Fortunately, current efforts to capture methane have kept annual emissions flat over the last 20 years despite growth in gas exploration, population, and GDP.

After natural gas systems, the second largest source of U.S. methane emission comes from the raising of animals for meat.  The grass that is eaten by animals creates methane in the digestive tract.  This has improved as researchers apply genetic engineering to both the animals and their food sources.  Consequently, according to the EPA, cattle in feedlots are easier on the environment than free range cattle are.  This occurs because the food source is engineered for higher digestive efficiency, and the resulting manure can be managed for methane capture.  Combine these efforts with genetic engineering for heavier animals, and the methane output per pound of meat is reduced each year. 

Surprisingly, another significant source of agricultural methane comes from a seemingly benign source.  Rice production requires great quantities of fresh water lying in rice paddies.  This ponding water generates methane.  Although work is being done to decrease and capture the methane from farm animals, pipelines, and landfills; very little has been done to control or capture methane from rice production. As a result, world methane emissions from rice rival the world’s garbage dumps.  This demands attention since rice is among the most common staple foods.

Natural gas (methane) is currently our most promising source of clean burning fuel.  As we continue to improve our methods of capturing and controlling it, we create a long term solution to a cleaner future.  It is local, storable, transportable, abundant, clean burning, and renewable.  All we need to do is capture it.  So what can you do?  Write your congressman about tightening the requirements for leak monitoring in natural gas systems.  Then eat less meat and rice.  The planet will thank you.

Tony F.

The Pity Party

On August 6, 2011 the U.S. government’s credit rating was down graded for the first time in history.  Instead of carrying the best possible credit rating in the world, we now have the second best.  Standard &Poor's had several reasons for the rating, but ultimately they cited the fact that the U.S. government failed to handle the budget within the necessary time frame.  Over the entire month of July our 2.5 party government played the blame game instead of doing the work.  The Republicans blamed Democrats, the Democrats blamed Republicans, and both blamed the Tea Party.  In the long process of taking stands and pointing fingers, adequate measures were not taken to protect our country’s credit.  After S&P announced their decision, the 2.5 party system continued on the same course of blaming each other and some even blamed S&P.  Welcome to the pity party my friends.

So who is responsible for this debacle?  We are.  We voted for politicians who promised to stop each other from getting things done.  We feared our government so much we voted to stop it from functioning.  The truth is that there is no one party that is right for the county all of the time.  This is the very reason why the two party system exists.  If we allow the Democratic ideal to run its course we would ultimately have a socialist society.  If we allow the Republican ideal to run its course we would ultimately have a feudal society.  Instead, our government operates as a pendulum between the two.  It is this great compromise that works.  In America one thing is always certain:  no matter what kind of party you have, someone will eventually be cleaning up after it.

In 2008, a majority of Americans elected a Democratic president along with a Democratic congress.  Immediately the Dems set out to make big changes in health care.  I don’t know if these changes were good or bad, but I do know that our pendulating government has the ability to change the bad stuff.  The damage would be temporary at most.  But this change scared many of us.  This fear opened the door for the Tea Party – a more extreme form of the Republican ideal.  They convinced us that the country was being destroyed by liberals.  So in 2010 we put handcuffs on Washington by intentionally gridlocking the system.  Instead of having a party we have stopped the music.  The 2010 election was last call.

I did not vote for Barack Obama but I am ok with letting the Democrats have their day.  Again, I firmly believe that any bad policy could be undone, and I firmly believe that if EITHER party controlled our government we would still have our AAA credit rating.  Our fear is the problem.  Gridlock is the problem.  Either party would have avoided a credit default.  Either party would have avoided a credit down grade.  In fact, the President and the Speaker of the House had reached a compromise, but they were stopped by the politicians we put in place to prevent compromise.   August 6, 2011 proves that this was a bad idea.  We cannot afford to prevent government action.   It doesn’t matter which party rules the country for a short time.  No party is permanent, and no policy is permanent if it is bad policy.  It is far better to vote for someone who will reach across the aisle to get something done than it is to fill our government with people who will take a stand regardless of the consequences.  The party, whichever one it may be, must go on.

Tony F.