Bubble News

[Originally posted on goofyblog 2.5.07]

Well, the Fed, the US Treasury and the Bush administration–the real axis of evil–would like to forestall the inevitable recession-depression until they carry out their forthcoming attack on Iran. That’s why Bush is sending another carrier group to the Gulf as well as a squadron of F-16s to Turkey. The US is clamping down on transactions with Iran’s main banks and has coerced the Saudis into “discounting their top-line sweet crude by $1.75 to US customers” (Golden Jackass.com) to put additional pressure on Iranian oil exports. This is the real story behind the falling (gas) prices, not the (East Coast) weather.
Uncle Sam is gearing up for another Middle East dust-up in Iran and the lower gas prices are (temporarily) averting a US recession.

[full article here]

A recession is certain, it’s only a matter of when. After the dot com bubble popped in 2000, real estate became a haven for investment. With prices going up every year, it was easy to think of home purchases as just an investment, a savings account even, whose total keeps rising; easy to become lulled into treating equity appreciation as eternal, to borrow on the future to finance a lifestyle dependent on continued prosperity even as wage growth was in decline.
Every year From 1915 to 1965, property doubled in price. But the dollar lost value faster so, in reality, homeowners lost one third of their purchasing power.

In real terms, the prices of 1910 went down all the way to the 1990s. Only recently did they begin to go up enough to offset inflationary losses. And only in 2005 did they regain the heights last seen early in the last century.

Liquidity and confidence were running at epic highs [in 1914] just before WWI. When they crashed, they crashed hard. Property in the United States did not recover for another 91 years. You can see the long trends in real property prices simply by opening your eyes.

Higher prices of real estate make it profitable to build tall buildings because the higher construction costs are offset by lower land costs. Most major cities in the United States had tall buildings built between 1914 and 1933 during the real estate boom of that time frame. After the tallest building was built, it typically took about 41 years for the real estate prices to return to levels that would justify buildings of similar height.

Here is a data set of example cities:

Region	Name of City	Tallest Building Built during previous peak	Year in which the record was broken.	Number of years to break the previous peak
West	Seattle	1914 (Smith Tower)	1969*	55
West	Los Angeles	1927	1968	41
West	San Francisco	1927	1965	38
Midwest	Chicago	1930	1965	35
Midwest	Minneapolis	1929	1973	44
Midwest	Detroit	1928	1977	49
Midwest	Cincinnati	1931	Not yet broken	75+
Midwest	Cleveland	1930	1991	61
Midwest	St. Paul	1930	1986	56
Midwest	Columbus	1927	1973	46
Midwest	Kansas City	1931	1980	49
East	New York	1931	1970	39
East	Philadelphia	1932	1974	42
East	Boston	1915	1964	49
East	Pittsburgh	1932	1970	38
South	Dallas	1923	1943	20
South	Houston	1929	1962	33
South	Tulsa	1918	1966	48
Foreign	Toronto	1931	1967	36
Foreign	Mexico City	1956	1984	28

[full text here]

By this measure, one could conclude that a housing downturn & recovery cycle could take 4 to 6 decades. And also that the average homeowner is just a bit better than his counterpart in 1910. But probably not, because the 1910 homeowner surely owned his home. Today, homes are bought on credit by those who have no down payment and are less creditworthy than ever thanks to interest-only and negative-amortization loans. Their debt doesn’t go down and it can get even higher.
Michael Hudson says in The New Road to Serfdom [here, then under Articles]:

The problem for recent homebuyers is not just that prices are falling; it’s that prices are falling even as the buyers’ total mortgage remains the same or even increases. Eventually the price of the house will fall below what homeowners owe, a state that economists call negative equity. Homeowners with negative equity are trapped. They can’t sell—the declining market price won’t cover what they owe the bank—but they still have to make those (often growing) monthly payments. Their only “choice” is to cut back spending in other areas or lose the house—and everything they paid for it—in foreclosure.

This is likely to happen soon. Declining prices don’t work well with sudden loan payment increases forced along by interest-only loans that have principle kick in after a 3-year grace period and ARMs resetting this year and the next:

[In 2007], an estimated $1 trillion of ARMs (Adjustable Rate Mortgages) are due to “reset” which will cause stiff increases in monthly mortgage payments. We’re bound to see a steady rise in defaults as well as a boost in new claims for personal bankruptcy.
This downward cycle is just beginning. In 2006, a mere $300 billion in ARMs reset pushing overleveraged homeowners to the brink of insolvency. Imagine what will happen in 2007 when $1 trillion of these explosive loans comes due.

[full text here]

Isn’t this obvious? How did we get here? Maybe, it goes to the core of how we are as a country now:

Why would the United States run such huge trade deficits, we wondered. It was obviously a bad idea, the nation was ruining itself. And why would it launch an invasion of Iraq…or begin a war on terror - both of which were almost certain to be costly blunders. It was as if the United States wanted to destroy itself - first by bankrupting its economy, and second by creating enemies all over the globe.

Then, we realized, that of course, that is exactly what it must do. People come to believe what they need to believe when they need to believe it. America is an empire; its people must think like imperialists. In order to fulfill their mission, the homeland citizens had to become what George Orwell called “hollow dummies.” An imperial people must believe that they deserve to be the imperial power - that is, they must believe they have the right to tell other people what to do. In order to do so, they must believe what isn’t true - that their own culture, society, economy, political system, or they themselves are superior to others.

It is a vain conceit, but it so bright and so big it exercises a kind of gravitational pull over the entire society. Soon, it has set in motion a whole system of shiny vanities and illusions as distant from the truth as Pluto and as bizarre as Saturn. Americans believe they can get rich by spending someone else’s money. They believe that foreign countries actually want to be invaded and taken over. They believe they can run up debt forever, and that their debt-laden houses are as good as money in the bank. [full text here]