Falling Prices Offer Big Opportunity
Though he’s since established himself as one of the most popular and highest-scoring guards in professional basketball, Gilbert Arenas’s star turn in the NBA was hardly a sure thing. While he assumed he would be a lottery pick out of the University of Arizona such that he would be given a guaranteed, three-year multi-million dollar contract, questions about his size and ball-handling skills pushed him into the second round where contracts are not guaranteed.
That Arenas was allowed to fall in the marketplace that is the NBA draft turned out to be a blessing in disguise. As evidenced by his draft position, NBA GMs deemed him not worthy of a guaranteed wage, but the non-guarantee steeled his resolve to prove the doubters wrong. In his second season he was voted the NBA’s most improved player, and thanks to the fluid nature of second-round contracts, Arenas beat those drafted in front of him when it came to signing a blockbuster free-agent deal with the Washington Wizards.
Undrafted out of high school and cut from the 1988 U.S. Olympic baseball team, future Hall of Fame baseball player Frank Thomas ultimately got called up by the Chicago White Sox for the 1990 season. From 1991 to 1997 Thomas finished in the top 10 of MVP voting every season; winning the award twice in ’93 and ’94. By the time Thomas left the world champion White Sox in 2005 he was the team’s all-time leader in home runs, walks and slugging percentage.
Still, Thomas left Chicago under a controversial cloud with team executives of the belief that his skills had diminished. With his value as a player in freefall in the eyes of baseball GMs, Thomas was reduced to signing a $500,000 contract with the notoriously cheap Oakland A’s. Happily his story didn’t end there. Thanks to his willingness to accept his new market value, Thomas went out and hit 38 home runs in 2006; success that led to a 4th-place finish when the media voted on the AL’s Most Valuable Player. After his season with the A’s, Thomas proceeded to sign a 2-year, $18 million dollar contract with the Toronto Blue Jays.
Shunned as a football recruit by the University of Southern California during high school, Tom Brady signed with the University of Michigan and was relegated to seventh on its deep depth chart of quarterbacks. Brady played behind Brian Griese for two years, then battled with “can’t-miss” recruit Drew Henson for the starting job during his final two seasons as a Wolverine. Though he ultimately won the starting job and secured All-Big Ten honorable mention honors both seasons, Brady slid all the way to the 199th pick of the 2000 NFL Draft; drafted behind NFL also-rans including Giovanni Carmazi, Chris Redman and Spergon Wynn.
Importantly, his low cost relative to other draft-eligible players made him more appealing to the New England Patriots and coach Bill Bellichick. Although he started out 4th on the Pats’ depth chart, Brady bided his time under Drew Bledsoe, and when the latter went down with a serious injury on September 23, 2001, Brady stepped in and led his team to victory in 11 out of 14 regular season games before quarterbacking them to Super Bowl XXXVI. Three Super Bowl victories later, and one league MVP on his resume, Brady will surely be a first ballot Hall of Famer when he eventually retires.
Famous today for its revitalized Art Deco buildings, as recently as the 1980s Miami’s South Beach section was considered very poor and run down, and had a high rate of crime. Glamour when it came to the southernmost section of Miami Beach was a distant memory.
But where the average individual sees failure, the entrepreneur sees opportunity. Agent Irene Marie opened Irene Marie Models (Miami’s first full service modeling agency) in 1989 in the former Sun Ray apartment building, and hotelier Ian Schrager soon followed with the opening of the Delano Hotel. Schrager is famous for finding areas down on their luck, and opening hotels that attract the glamorous and even more development. What was formerly a run-down area of faded beauty now attracts the world’s beautiful thanks to previously collapsing values that made new investment possible.
During the first third of the 20th century, Pasadena, California was a resort town for well-to-do Midwesterners eager to escape the winter chill of the Midwest. Prominent industrial families including the Wrigley’s, the Gambles and Huntingtons constructed remarkable winter homes that still stand today. Colorado Boulevard stood as the equivalent of Beverly Hills’ Rodeo Drive, and it was where the rich went for shopping, food and entertainment.
Sadly, the Great Depression hit Pasadena hard, and by the 1970s formerly alluring Colorado Boulevard had been reduced to a combination of seedy bars, pawn shops and adult bookstores. Rather than a place to stroll, it became a street to avoid. But with property values at their nadir, entrepreneurs did what they always do in sensing value where others don’t, and soon enough restaurants, movie theaters and clothing stores revitalized a street that once served as a symbol of urban decay.
And when we look to New York City, formerly abandoned and inexpensive areas such as Tribeca, the Meat Packing District and the East Village now compete with midtown and uptown Manhattan for residents and top chefs. So great has Manhattan’s revitalization been that previously down-market areas outside the borough such as Brooklyn’s Williamsburg are now considered very fashionable.
The stories found in the sports and property sectors take on new relevance amid attempts by our political class to shield us from the difficulties that arise when an economy slows. Much is being made by politicians of reduced demand for workers and property, and to fix this seeming shortfall, a bipartisan effort is afoot to aid both. Low-income workers will receive checks from the federal government, while Illinois Senator Dick Durbin (D) is seeking an extension of unemployment benefits. On the property front, Congress is set to pass a $15 billion “housing stimulus package” meant to drive more home purchases through various tax breaks which would make a heavily subsidized sector even more reliant on state handouts.
The Washington consensus is a mistaken one; one rooted in the misbegotten belief that employment and housing slowdowns result from collapsing demand. That’s incorrect. Instead, our leaders should recognize that buyers of housing and labor disappear when both are supplied at rates above the market-clearing level. It’s only when prices are allowed to fall that intrepid buyers step in given their unending search for value.
So if we ignore for now the enervating quality of subsidies and handouts, we must say that they’re most problematic for pricing workers and housing at levels that make them unattractive to employer and investor alike. Indeed, as the examples from the sports and property world indicate, a great deal of success is conceived when markets are left alone to sort out all manner of prices. And if Washington simply steps aside, today’s property and employment showdowns will surely father more success stories.