January 7, 2011
Valparaiso is Chile’s largest and most famous beach town, only about a 2 hour drive from Santiago. It’s summertime here, so it looks more like the south of France or coastal Spain than you would expect of a relatively unknown place like Chile.
This is typically the reaction I get when I talk to most people about Chile– they know about the miners, and they know about the earthquake, but their expectations are of some banana republic, not an exceedingly civilized, almost European country.
On that note, let’s move on to this week’s questions.
First, Nancy asks, “Simon, what happened to the 7.0 earthquake in Chile this week? What’s it like being in an earthquake region?”
To be honest, I didn’t have the foggiest idea that we had an earthquake a few days ago. It was fairly close, about 350 miles away, yet we didn’t feel anything here in Santiago.
Every country in the world has multiple elements of potential disaster– hurricanes, tornadoes, earthquakes, wildfires, volcanoes, landslides, floods, avalanches, blizzards, disease pandemics, etc.
It happens everywhere, there’s no avoiding it. Some of the worst natural disasters in history have been in places like Portugal, New Zealand, Thailand, Alaska, Japan, US, Italy, Turkey, Mexico, Argentina, etc.
I’m not trying to be nonchalant about such awesome forces of nature, but have experienced several myself, the critical distinction is how each place deals with its disasters.
Floridians, for example, are so accustomed to hurricanes that they laugh off anything below a Category 5 storm. In Texas, tornadoes are frequent– in fact we had one when I was in Dallas a few months ago. I watched it from my balcony, as did everyone else.
Similarly, Chile has a geological predisposition to earthquakes; every couple of decades, the country suffers a major earthquake in the 8’s. Last year’s 8.8 was brutal, though loss of life was ‘minor’ by comparison at 521 victims.
Hurricane Katrina, by comparison, claimed nearly 2,000 lives, while the 7.0 Haiti in 2010 earthquake claimed 230,000.
The one that occurred this week was a 7.1 on the Richter scale, stronger than what destroyed Haiti last year… however there was barely any damage in Chile this week because this country has incredibly strong building code, construction quality, development planning, and response teams.
On the other hand, I’ve been to a lot of tropical countries where intense rains are commonplace. I’ve seen new developments built, and the first time a heavy rain comes, the place floods… it’s as if nobody designed the roads and structures to cope with flooding despite the high likelihood of this happening.
Panama is one place where I’ve been underwhelmed by the exceptionally poor construction quality, especially with Panama City condominiums. In fact, one relatively unknown fact is that the country does have occasional earthquakes; at one point last year, three earthquakes hit Panama in less than 12 hours.
Some day a relatively minor 6.0 is going to come within 100 miles of Panama City… and I wouldn’t want to be anywhere near the place, and certainly not on the 60th floor of those shiny new condos.
That being said, if you’re terrified of earthquakes, don’t come to Chile. There are plenty of wonderful places in the world, this is just one of them.
Next, my friend Gene wrote, “I turned on Fox Business News this morning. They told me that mortgage rates are rising, and this will prompt buyers to jump into the market for fear missing out on these low rates. This will spur demand and cause home prices to gain. Man, that Stuart Varney really knows his stuff.”
Thanks for the laugh. There’s clearly an inverse relationship between interest rates and property prices in our credit-fueled world. Nobody cares how much s/he pays, but rather how much the monthly payment is.
When interest rates are at 4.5%, $2,000/month buys you a $400,000 house. When interest rates rise to 8.5%, that same $2,000/month buys you a $260,000 house.
Monthly payments are a function of income, and if all I can afford is $2,000/month, then the best I can offer on a home is $260,000. This is bad news for home prices, period.
If you add in a healthy dose of unemployment, the overhang in unsold existing inventory, the shadow inventory of future foreclosures, the effects of rising property taxes, and a steady stream of new homes still being built, I would argue that the overall outlook on the US housing market is dismal.
I’m considering selling long-term call options on some of the builders, but we’ll get to that another time… I’m off to the beach for now.