For Sale

[Originally posted on goofyblog 8.28.06]

Last Sunday, I phoned a friend of mine who is now a professor in a small college town in Iowa. She and her husband still own a small house in Cincinnati where there is now double-digit deflation.
Because the house isn’t worth near what they bought it for, they may have to file for bankruptcy. Yet the new bankruptcy laws pushed through last fall by the Bush Administration would force them to sell off their musical instruments. My friend is a music professor and her husband is a music teacher and in 2 bands.

Click here for a recent article on this stupid new law.
Today’s New York Post had the following(full is here):

“The red-hot housing market that powered the U.S. economy for the past three years has officially cooled off. Houses are sitting unsold for months: the current inventory of unsold properties hit the highest level since records began to be kept in 1999.”

But there are dozens of news articles coming out every week from all over the country, aggregated here and also here.

It would be easy to make the point that the Bush Administration’s suicidal economic policies have made things much worse as argued here.

But, housing is intensely over-priced and has literally been the only thing driving the American economy for at least 6 years. Consumer spending and most of the job growth in the US have been directly related to housing hyper-inflation. For at least the last 2 years, anyone who could fog a mirror could get a 100% loan to buy the home/condo/double-wide of their dreams. What now? This early-summer article offers one scenario.

Bill Bonner, the co-author of Empire of Debt, has a blog, Daily Reckoning, that offers another:

Classical economists recognize that the excessive credit expansion has many impacts on the financial markets and the real economy.
Asset prices, including houses, inflate.
Savings rate disappears
Trade Balance goes negative
Capital Investment dries up
Wages and employment drop

Finally, a paper, written in 1991, concludes:

When the decline begins, it is longer than stock market crashes due to: a) the lack of short selling, b) the tenacity to which owners cling to mortgaged property, and c) the slow process of foreclosure. During the downswing, the net income of real estate falls due to falling rents and increased vacancies, while mortgages and other operating costs remain rigid in the short term. There are widespread defaults on mortgages and other loans. The foreclosure rate increases. Unemployment and lower real wages further reduces demand for real estate. To secure occupants, rents decrease. Many banks fail, having loaned large amounts to illiquid and fallen real estate.

After the old obligations such as mortgages and contracts are gone and the wreckage of the collapse is cleared away, shrewd investors pick up real estate bargains. With debt reduced and prices, including interest rates down, lower costs induce a renewed rise in business and the recovery phase of the cycle.

Historical data from the U.S., Great Britain, Germany, and other countries have shown that real estate booms have preceded major depressions. The theory that the major real estate cycles, accommodated by monetary inflation, have significantly contributed to major depressions is consistent with the historical record.

Most of the jobs I’ve held in the past few years have been related to financial or real estate(think most bank, IT, construction, ad agency, etc.). So many friends are similarly dependent on those types of jobs. Does anyone in the US work at making things other than new houses or office buildings anymore?