How a Weak Dollar May Strengthen Our Real Estate Market

by Alex Stenback on September 12, 2008

I prefer a strong dollar for eternity, but right now I feel about the dollar what St. Augustine felt about chastity. To paraphrase his notorious prayer, "Lord, make our dollar strong, but not just yet." - Bob McTeer, former President of Dallas Federal Reserve Bank

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Do you want a stronger dollar, or a weaker dollar? 

If you ask that question to the next three people you see, chances are they’ll say (perhaps emphatically,) "Stronger." After all, it’s the Greenback, and we instinctively equate a strong dollar with a strong nation.

And mostly, over the long haul, a strong dollar is a good thing.  It helps keep interest rates low, is a sign of a strong economy, and something worth rooting for.

But right now, a weaker dollar may be just the thing that helps lead us out of the real estate wilderness, and is probably what you should be rooting for.

That’s because a weak dollar helps manufacturing and other industries that export goods and services by making the cost of their goods cheaper, relatively, than those of foreign competitors. 

In other words, a weak dollar drives up foreign demand for our products and services, so it’s a boon to exports.

You might remember last weeks post on the Beige Book, which higlighted manufacturing as of the few bright spots in our local economy.  This was driven by, you guessed it:

"Business is booming due to exports," commented a Minnesota metal fabricator.

So when the dollar falls, Minnesota based exporters get a boost – hopefully large enough to make up for or exceed sputtering domestic demand, and cause them to add jobs and expand operations.  All sorts of good things flow from that.

Why this Matters to our local real estate market:
The recovery of our real estate market, and more importantly, it’s long term health, is about not about ARM’s adjusting, foreclosures, or the legacy of subprime and the real estate boom. 

It is about jobs and the local economy.  The stonger our local economy and job market, the quicker the recovery.

Exports_as_gdp_msp

To elaborate, we point you to a piece from Yesterday’s Wall Street Journal on the impact of exports on local economies. See also the cool interactive graphic (screenshot above):

Export-driven growth marks a dramatic shift in an economy that has relied heavily on consumer spending. That has slowed in recent months as Americans, nervous about job losses, teetering banks, falling home values, and rising gasoline and food prices, have tightened spending. Against that background, exports have emerged as a powerful motor…

It’s a badly needed tonic for the beleaguered U.S. economy.

To be sure, Minnesota is far from the largest "net exporter," so we’ll need more than just weak-dollar driven exports to pave the road to recovery, but for now, we’ll take any help we can get.

{ 2 comments… read them below or add one }

Arkansas Land September 12, 2008 at 2:54 pm

This is a really unique, and thankfully positive, way to look at the current dollar value and real estate market in the country. I know there is a large uproar over the economy, but it will turn around, just like it always does.

Nate September 15, 2008 at 3:20 pm

Couple points to consider with this.

1) The increase in manufacturing is directly linked to the weak dollar. If the dollar strengthens, the work is likely to get moved to cheaper suppliers again. This isn’t changing the business of manufacturing, its just making U.S. based manufacturers more competitive while the dollar remains weak. We haven’t seen any major instances of a return to “inshoring” work or a dramatic shift in business models.

2) Increased spending from overseas, taking advantage of the weak dollar, is often linked to how well those foreign economies are doing. For the last couple years we’ve seen significant capital spending from overseas, this has been slowing significantly this year as those economies have begun to falter as well. Much has been written recently that the global economy is still dependant on the U.S. economy, decoupling does appear to be over-hyped.

3) The one exception to this is investment from petroleum rich or energy producing nations. Their economies will do just fine regardless of the rest of us, unless someone invents a car that runs on water. There are a lot of parallels between this investment now, and the Japanese investment in the U.S. during the 80s recession. The Japanese “invasion” never occured, and much of the property and businesses were later sold when Japan hits it’s long-lasting depression through the 90s. This time may be different, and significantly alter the economic landscape when we get out of this.

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