A pause today in the saga of the House of Labor (more interesting developments later today or tomorrow) to talk about your own house–or, really, all those houses built of paper profits. I’ve been meaning to say something about this for sometime and two things happened over the weekend that got me off the dime.
“I’m a millionaire but can’t pay my bills,” a friend told me last night. She was talking about how her Los Angeles home, a comfortable but modest abode, has doubled in price in just 4 years, pushing its sale price to over a million bucks. And, then, right on my table next to my bed was the new issue of The Economist. It’s got a cover story with a picture of a brick falling; the brick has “house prices” written on it and the cover title is “After the Fall.”
Maybe because I’ve been a life-long renter I’ve never been able to fathom the insanity of housing prices. So, here’s what you should prepare for–those prices are going to come down and it is not going to be pretty. The Economist story inside the mag has a picture of a sand castle on the beach, with water roaring in and a headline: “In Come the Waves,” with a subhead: The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.”
The magazine is certainly not the first to raise this worry. But, this alarm is more serious because the reporters look at the phenomena in a broad historical and global context. The value of residential property in developed economies rose $30 trillion over the past 5 years, to $70 trillion, “an increase equivalent to 100 percent of the countries’ combined GDP…” that would be Gross Domestic Product. You get that? The paper wealth of housing equals the ENTIRE economic output of all those countries.
Now, NOTHING can justify that from an economic standpoint. Nothing. We didn’t create some new product. It’s not because of some great rise in productivity. It’s pure speculation.
The Economist has this sobering reality. The current housing bubble is larger than the stockmarket bubble in the 1990s (everyone raise their hands who thought they were rich and now owns a depleted 401k) and–this is Stephen King scary–bigger than the stockmarket bubble of the late 1920s, which, in case anyone has forgotten, when it collapsed triggered the Great Depression.
Now, you may know because you’re one of those people…but there’s a lot of roulette going on here. A lot of people are buying up houses with mortgages that assume prices will rise rapidly enough so that they can sell the house or refinance BEFORE any of the principal has to be repaid. They are also counting on continued low interest rates.
The problem here is the same problem with any Ponzi scheme. All it takes is someone–or a group of someones–to say “I’m getting off this train.” Then, it’s a dash for the exits, with people who get out first surviving but a whole lot of people getting hurt.
Prices don’t even have to drop dramatically to trigger a crisis. Even if they level off, which they will do, it will cause a serious hit to the economy. You might be like some of those paper-housing rich folks: drawing out a bunch of cash from your home based on some illusion of more wealth. When that wealth disappears, so will consumer spending. As The Economist notes, “Over the past four years, consumer spending and residential construction have together accounted for 90 percent of the total growth in GDP.” That is, everything else we did in the economy–everything that was made and produced–only made up 10 percent of the economy outside of houses built and the stuff we bought from a phony wealth created by sheer speculation.
My last thought. Why do people behave this way? I think it’s pretty obvious that the speculation is driven by the darker side of the economy. When people are looking at low wage growth, health care costs out of control that are saddling them with tremendous costs, pensions they were counting on being taken away and replaced by unreliable 401(k)’s, they want to believe that some sort of vehicle still exists to power their middle-class dream and fulfill the highest calling, urged on by none other than the president, that when crisis hits, just shop.
It’s like living in a family with a drunk. No one wants to blow the whistle and say, “this is insane.”
Be afraid.
Addendum: After writing and posting this, I turned to the Wall Street Journal this a.m and found today’s housing article (subscription required), whose important point is: “New federal housing data show that the nation’s most overheated local housing markets now make up such a large share of the total U.S. market that a sharp fall in their values could stall or slow national economic growth.”
