Thursday, April 21, 2005
The Great American Housing Bubble begins to burst
This is a shit hitting fan type story. The U.S. economy has been propped up over the last five years by consumer spending, despite that net loss of jobs in the country. It wasn't wages that fuelled consumer spending, it was rising property values and the credit it had available. Hence the reason that total credit (private and public) in the U.S. is at 300% of GDP. This is higher than anytime during the great depression which was the previous peak.
The U.S. is facing a massive econmic decline, much like Japan did when its property price bubble burst in the late eighties. Combine this with high oil prices, a stubborn guerrila war, and a meglomanical president who's corrpution is unprecedented in recent time, then the future looks a bit grim.
Jax
The southern California housing crisis, of course, has a sunnier side as well. In the past five years median home values have increased 118% in Los Angeles and an extraordinary 137% in neighboring San Diego. Homes, as a result, have become private automated teller machines (ATMs), providing their owners with magical, unearned cash flows for purchasing new sports utility vehicles, making down payments on vacation homes, and financing increasingly expensive college educations for their kids. Second mortgages and home refinancings, according to a Wharton Business School survey, have generated an astounding US$1.6 trillion in additional consumption since 2000.
The great American housing bubble, like its obese counterparts in the United Kingdom, Ireland, the Netherlands, Spain and Australia, is a classical zero-sum game. Without generating an atom of new wealth, land inflation ruthlessly redistributes wealth from asset-seekers to asset-holders, reinforcing divisions within as well as between social classes. A young schoolteacher in San Diego who rents an apartment, for example, now faces an annual housing cost ($24,000 for a two-bedroom in a central area) equivalent to two-thirds of her income. Conversely, an older school-bus driver who owns a modest home in the same neighborhood may have "earned" almost as much from housing inflation as from his unionized job.
The current US housing bubble is the bastard offspring of the stock-market bubble of the mid-1990s. Housing prices, especially on the west coast and in the east's Bos-Wash (Boston-Washington, DC) corridor, began to rocket in the second half of 1995 as dot-com profits were plowed into real estate. The boom has been sustained by sensationally low mortgage rates, thanks principally to the willingness of China to buy vast amounts of US Treasury bonds despite their low or negative yields. Beijing has been willing to subsidize US mortgage borrowers as the price for keeping the door open to Chinese exports.
Similarly, the hottest home markets - southern California, Las Vegas, New York, Miami, and Washington, DC - have attracted voracious ant columns of pure speculators, buying and selling homes in the gamble that prices will continue to rise. The most successful speculator, of course, has been George W Bush. Rising home values have propped up a stagnant economy and blunted criticisms of otherwise disastrous economic policies. The Democrats for their part have failed to address seriously the crisis of millions of families now locked out of home ownership. In a bubble city such as San Diego, for instance, less than 15% of the population earns enough to finance the cost of a median-value new home.
The bubble has already burst in San Francisco, and the April 11 issue of Business Week headlined fears that a general deflation - perhaps of international magnitude - is nigh. What will life be like in the United States (or Britain or Ireland) after the home-equity ATM shuts down?
The business press, as always, reassures passengers that they are headed for a "soft landing", a slowdown rather than a crash, but even a mild jolt may be sufficient to end the current anemic recovery and throw all the dollar-pegged economies into recession. More ominously, some eminently respectable Wall Street economists, like Stephen Roach of Morgan Stanley, have been warning of a dangerous negative-feedback loop between the foreign-subsidized housing bubble and the huge US trade and budget deficits. "The funding of America," he has written, "is an accident waiting to happen."
At the end of the day, US military hegemony is no longer underwritten by an equivalent global economic supremacy. The housing bubble, like the dot-com boom before it, has temporarily masked a mess of economic contradictions. As a result, the second term of George W Bush may hold some first-class Shakespearean surprises. (Link)
The U.S. is facing a massive econmic decline, much like Japan did when its property price bubble burst in the late eighties. Combine this with high oil prices, a stubborn guerrila war, and a meglomanical president who's corrpution is unprecedented in recent time, then the future looks a bit grim.
Jax
The southern California housing crisis, of course, has a sunnier side as well. In the past five years median home values have increased 118% in Los Angeles and an extraordinary 137% in neighboring San Diego. Homes, as a result, have become private automated teller machines (ATMs), providing their owners with magical, unearned cash flows for purchasing new sports utility vehicles, making down payments on vacation homes, and financing increasingly expensive college educations for their kids. Second mortgages and home refinancings, according to a Wharton Business School survey, have generated an astounding US$1.6 trillion in additional consumption since 2000.
The great American housing bubble, like its obese counterparts in the United Kingdom, Ireland, the Netherlands, Spain and Australia, is a classical zero-sum game. Without generating an atom of new wealth, land inflation ruthlessly redistributes wealth from asset-seekers to asset-holders, reinforcing divisions within as well as between social classes. A young schoolteacher in San Diego who rents an apartment, for example, now faces an annual housing cost ($24,000 for a two-bedroom in a central area) equivalent to two-thirds of her income. Conversely, an older school-bus driver who owns a modest home in the same neighborhood may have "earned" almost as much from housing inflation as from his unionized job.
The current US housing bubble is the bastard offspring of the stock-market bubble of the mid-1990s. Housing prices, especially on the west coast and in the east's Bos-Wash (Boston-Washington, DC) corridor, began to rocket in the second half of 1995 as dot-com profits were plowed into real estate. The boom has been sustained by sensationally low mortgage rates, thanks principally to the willingness of China to buy vast amounts of US Treasury bonds despite their low or negative yields. Beijing has been willing to subsidize US mortgage borrowers as the price for keeping the door open to Chinese exports.
Similarly, the hottest home markets - southern California, Las Vegas, New York, Miami, and Washington, DC - have attracted voracious ant columns of pure speculators, buying and selling homes in the gamble that prices will continue to rise. The most successful speculator, of course, has been George W Bush. Rising home values have propped up a stagnant economy and blunted criticisms of otherwise disastrous economic policies. The Democrats for their part have failed to address seriously the crisis of millions of families now locked out of home ownership. In a bubble city such as San Diego, for instance, less than 15% of the population earns enough to finance the cost of a median-value new home.
The bubble has already burst in San Francisco, and the April 11 issue of Business Week headlined fears that a general deflation - perhaps of international magnitude - is nigh. What will life be like in the United States (or Britain or Ireland) after the home-equity ATM shuts down?
The business press, as always, reassures passengers that they are headed for a "soft landing", a slowdown rather than a crash, but even a mild jolt may be sufficient to end the current anemic recovery and throw all the dollar-pegged economies into recession. More ominously, some eminently respectable Wall Street economists, like Stephen Roach of Morgan Stanley, have been warning of a dangerous negative-feedback loop between the foreign-subsidized housing bubble and the huge US trade and budget deficits. "The funding of America," he has written, "is an accident waiting to happen."
At the end of the day, US military hegemony is no longer underwritten by an equivalent global economic supremacy. The housing bubble, like the dot-com boom before it, has temporarily masked a mess of economic contradictions. As a result, the second term of George W Bush may hold some first-class Shakespearean surprises. (Link)
