What would Milt Friedman say about the real estate market?

The legendary economist Milt Friedman was a strong believer of minimizing the amount of resources in government and maximizing the resources that are in the private sector. The private sector will be more apt to use the resources most efficiently. Of course government would have to police and regulate the private sector to prevent abuses. I became familiar with Milt Friedman's teachings as a college economics minor over 40 years ago. Now as a real estate appraiser for almost 40 years, I think more and more about Milt Friedman in this topsy turvy real estate market. I've completed thousands of assignments. In every one of those assignments supply and demand principles were considered. I've seen the abysmal markets of the mid-late 1970's, some in the 1980's, some in the mid 1990's and some most recently. Every category is heavily influenced by supply and demand. If there is an oversupply and/or lack of demand for a real estate asset, the price will be reduced. If there is a relatively high demand and/or under supply for the real estate asset category the price will increase. This is the most basic law of supply and demand. Industrial Development Agency (IDA) legislation was created in 1969 in New York State. By the 1980's the IDAs began to multiply and was used as a important stimulus program in New York State development circles. Currently, IDAs are behind many developments in New York State. In addition, many of the tax abatements, grants and low interest loans are also made available to developers, consumers and others without direct IDA involvement. There are subsidies from many sources in all markets. The theory behind this type of insertion of stimulus is that "all boats will rise in a rising tide." Certainly there have been many successes especially in the Downtown areas of the urban centers across New York State and the New England region. The suburban areas have also benefitted but by a lesser amount. Government, quasi governmental authorities and various subsidy programs have had a great influence in almost every type of real estate asset. Of course for manufacturing, the influence can be large i.e. Global Foundries near Albany. But it also has had a major impact on warehouses, hotels, shopping centers, office development, apartments, resort projects and even the single family home. The downside of all this is that consistent non private sector involvement has damaged the basic principle of supply and demand. Many local, state and federal governments have deficits, due to the insatiable appetite for these programs. There is current legislation to reduce or eliminate the IDA's as was done to the Empire Zone program in New York State. But the dependancy is too strong, it's an addiction on its worse day. The local, state and federal governments won't downsize and therefore taxes will not be reduced. Therefore, we need the subsidy programs. Just last year the legislature in New York State effectively increased income taxes by almost $2 billion on high income earners by not renewing a previous income tax decrease which acted as a stimulus. It's a double edged sword since these subsidy programs result in various existing buildings having less and less residual value. This reduces the net worth of property owners which discourages investment activity. The reason for many of these government and quasi government agencies need to grant subsidies is because the private sector is so burdened by taxes, fees and regulation. New projects do create jobs and new tax base, etc. However, there is a snowball effect in that more supply is created in an unnatural market way. In other words, an overall supply is created which dilutes the value of the existing supply. And when the tax abatements, low interest loans and other development benefits expire, the value of the former new project's residual is also reduced. The solution is to reduce government involvement by reducing taxes to such a low level that the private sector will initiate and sustain the projects based upon natural supply and demand. This appears to be an unrealistic expectation because the many and large special interest groups have such a stranglehold on government at all levels. In summary, I think Milt Friedman is probably turning over in his grave. John Rynne, MAI, SRA is the president and owner of Rynne, Murphy & Associates, Inc., Rochester, N.Y.