Saturday, October 17, 2009

The Coming Housing Bust - Business Week

I guess it's time that I out myself. I have been writing this blog for four years and in that time I spoke about the housing bubble well before it was a national concern, I wrote about GM's failing management strategy, oil prices, and banking failures. There will be much more to discuss as the US recovers from the "Great Recession".

Two weeks ago my phone rang. It was a Business Week reporter who wanted to discuss a thought I had posted on the Hot Property blog. All the research I am doing shows that we will have a large housing problem as soon as the boomers begin to retire in mass. In short, there are too many large suburban and exurban homes that will not be desirable to younger generations. This thought was first established in a 1989 paper by N. Gregory Mankiw and associates titled "The Baby Boom, Baby Bust, and the Housing Market". This paper surmised that as baby boomers aged and moved into smaller houses population growth and demographics would not be strong enough to backfill into these homes. We know now that this paper was premature yet I believe it's still relevant.

I spoke for a few minutes with the reporter about my thoughts on the matter. We had a great discussion and I'm pleased that the article was more or less on par with what we discussed.

It's even more relevant today than it was then - we are in a long term energy price spike. Higher energy prices have always resulted in a conservation movement in this country and I don't expect this time to be any different. This could be the start of a long downhill trend for the housing market, regardless of any short term upticks or stabilization of the market.

Monday, October 05, 2009

The Economics of Camping

Another summer has come and gone and while camping is winding down in a majority of the US, it's just coming into season in Florida. Camping has always been one of my more enjoyable hobbies and I had an interesting exchange with a campground host at my last outing which lead to this post.

It should be clear to everyone by now that we are in a recession (or maybe just exiting one). Why then have camping rates risen so much over the past year? The Florida Parks Service has raised campground fees at many campsites 10% or greater, with one park (Rainbow Springs) having a 20% increase in camping fees. Why would the parks be raising the camping fees when the economy is weak. I had a wonderful conversation with an employee of the Parks service at the headquarters in Tallahassee when I called to ask him this exact question. He clearly stated that costs have risen since the previous rate hike, especially utility expenses. Check. He also stated salaries of the park staff. Check. I asked him what sort of falloff in visitors they would see from this hike (the price elasticity) and he admitted it would probably be brutal in the beginning before starting to come back. Double check.

I have to believe the parks service had someone run the price elasticity of demand to determine if total revenue would increase or decrease with an increase in price. Without the snowbirds coming, a decrease would be guaranteed. Yet, so many snowbirds come to Florida with their RVs and I cannot see them turning around just to save another $6 per night. There is no easy substitute product for Florida RV sites, and private camps often have high fees. Sure, maybe some will go to Texas but if an east-coaster tries to save a few dollars on camping they'll probably spend more on fuel. I do believe there is a price at which people will begin to feel camping is too expensive, and I believe we have crossed that point.

Let's take the hypothetical John Doe family. Mom, dad, and two kids. Assuming their camping purpose is to save a little money when visiting Disney World, let's see how much they would save by camping. For the parameters of the model, we will assume that this family will camp 2x per year, that camping gear lasts 5 years, and they would not use the gear outside of camping. Let's look at the expenses of the Doe family:
Tent: $75
Cooler: $20
Sleeping bags $20x4=$80
Other supplies:$10 per night (includes stove, lantern, firewood, charcoal, plates, napkins)
Camping site fee: $30 per night

We're going to remove food from this model as that is required whether camping or not.

The model looks like: CN = ((T+C+S)/10)) + O + S
Taking the total supplies the cost to camp (T+C+S) is $17.50 per night. Add in supplies and site fee and we arrive at a grand total of $57.50/night to camp (CN).

It's not too hard to find hotels close to Disney for $57 a night. The only places to camp around Disney for $30 a night are at least 1 hr drive away from the parks. In almost every circumstance, except as noted below, it would be equal or cheaper to stay in a hotel. *Exception: the Doe family gets immense enjoyment out of camping, which cannot be quantified in this model*

Thesis: Many campgrounds are going to price themselves out of the market.