The Forgotten Value of Knowing How Widgets Are Made - Part 1

Regular readers know that I’m not very good at math or economics. A few months ago I did a post that confessed I was lost when it came to understanding just what the hell happened to the world’s economy and what should be done about it.

I’ve been thinking about it off and on since.

In the late Nineties and continuing to about 2006, I went to Florida, Destin and Apalachicola in the Panhandle, a lot on the weekends.

In Apalachicola Bay there’s a small island, St. George, where I rented houses on the beach a number of times. There was a whole row of these skinny, three-story houses. They were great for the weekend – steps to the beach, maybe a quarter mile to the little town square where you could walk to get supplies, breakfast, lunch and a beer and return to cook your fresh shrimp and corn on the cob on the barbecue on the deck for dinner.

It always amazed me how cheap they were to rent – considerably less than a nice hotel on the beach cost. And, I came to realize that almost no one actually lived in them full-time.

Mid-way through my Florida weekend years I started going to Destin. It and its neighboring towns, Seaside (the location where The Truman Show was filmed), Watercolor, Santa Rosa are gorgeous. Think of the row of three story beach houses on St. George Island on steroids.

I stayed at a friend’s house in Santa Rosa. He had bought it in the low hundred thousands a few years before. He, and thousands like him bought up the beach as market values increased to double and triple what they paid for the properties.

Like on St. George Island, most of the houses weren’t lived in full time. Their owners came down for a few weekends a year and rented them to tourists the rest of the time. And also like St. George Island, the rents were cheap – there was a lot of competition.

The “plan” all along the Florida coast and in Arizona, California and other resort areas was to buy low (or relatively low as prices rose), pay for insurance, maintenance and the mortgage with the rental income and then sell and double or triple your money. To do that the hordes of investors took out interest only mortgages so that their costs approximated their income. Why pay principle when equity increased every month and you could use it to “trade up?”

And it wasn’t only snowbirds that succumbed to the call of easy money. American industry and the banks started to operate on the same plan, as did many of rest of us when it came to buying into the American dream of owning a home.

Then it all fell apart. Why is that? Well that’s the widget story, which is coming soon to a blog near you. Stay tuned.