It’s starting to look as though our nation’s economy is bottoming out; the big drop in economic activity is abating. Things are bumping along the bottom right now. Perhaps by mid autumn there will be sure signs of renewed economic growth; unfortunately, those first signs will not include higher wages and increased employment. That trend won’t start until sometime in 2010.
We’ve just gone through the biggest economic drop relative since the 1930s. It wasn’t expected, it came on suddenly, and has done a lot of damage that will take much time and many resources to fix.
The big lesson, I think, is that real estate bubbles are nasty things; and maybe that’s because real estate ownership itself can be a nasty thing, despite all the myths about how good it is for average Americans to own real estate. America got into a serious real estate bubble sometime around 2002 (although there had been smaller bubbles in the 1980s due to Baby Boom demand), not long after the internet bubble burst. When the internet bubble burst in 2000, it didn’t do all that much damage; the big stock market run-up from 1995 came to an end, but unemployment hardly rose and Americans continued their vigorous consumer spending.
By contrast, the breaking of the real estate bubble has been vicious. Many major financial institutions collapsed or required massive taxpayer bailouts; banks stopped lending; unemployment rose; consumers stopped consuming; two thirds of the American auto industry collapsed; unemployment shot up, and the government has borrowed billions of dollars (on top of the trillions it already owes), which will weigh down the economy for at least a decade. And the whole situation reverberated internationally, amplifying the whole thing. Our government economic leaders (Bernacke, Paulson, Geitner, etc.) reacted quickly and hopefully stopped the bleeding in time. But the patient is still weak, and recovery is going to take a long time. That’s about where we are right now.
So what is the difference between real estate speculation and other kinds of speculation (such as the internet company craze of the 1990s, or the tulip craze of the 1630s)? That is a key question for economists and policy makers of the future. I believe that the key difference is that most other bubbles, especially technology bubbles, leave something behind that continues to help the economy. E.g., better technology. Even the tulip bubble left the world with something good – more tulips!
By contrast, a real estate bubble, along with all the crazy financial machinations that prop it up (currently known as “toxic assets” and “default swaps”), don’t leave you with much. There’s only so much usable land on the planet, even less in the places that economically count the most (i.e., the American suburbs). There have been some expansions of usable real estate over the past 5 or 6 years as roads and infrastructure were built to open up formerly unused lands, e.g. in the Arizona desert or the Florida swamps or the foothills of eastern Pennsylvania. But opening up new property takes time, and bubbles usually don’t give the economy enough time to significantly expand its usable land inventory. For the most part, bubble money is simply chasing what is already in place. And when it blows, much of the new stuff that was built deteriorates quickly (e.g., foreclosed properties deteriorate quickly and are subject to fires). And since the new lands that were opened were done quickly (by “fast-money” developers), they will probably have negative ecological consequences in coming years.
Personally, I’ve always had mixed feelings about real estate, even though the nation as a whole seems to have a love affair with it. I never owned any real estate, and hope not to. It can bring out the best in people (e.g., homeowners who put a lot of sweat and communal effort into maintaining a livable neighborhood), but it also brings out the worst (e.g., NIMBY activism, ethnic divisions about who is or isn’t welcome in the neighborhood, etc.). Nonetheless, real estate ownership is a key component of “the American Dream”; it has gained mythical status. To be considered a successful, responsible American, you have to own real estate; this line of thinking goes all the way back to the “Founding Fathers”. Thus, a huge industry has built up around real estate, which has been further inflated with all kinds of government subsides (e.g. tax deductions for mortgage interest, special government-sponsored institutions to facilitate mortgage credit such as Freddie and Fannie, etc.).
Now America is seeing that perhaps real estate is NOT so innocent, after all; perhaps it should not be up there with motherhood and apple pie. Lots of “dippy urban-planner types” had been complaining for many years about the environmental evils of “suburban sprawl”. They cried, mostly unheard, about the consequences of replacing natural forests and meadows with low-density exurban developments where everyone has to drive for miles just to buy bread and milk and get the kids to school, and where most of that driving is done with gas-guzzling SUV’s needed to get through the snowy winter weather. These dippy sprawl-opponents were ignored over the past 20 years by Republican politicians and well-intended families seeking their stake in “the dream”.
But now, it almost appears that Mother Nature has struck back, perhaps disguised by declining property values, collateralized debt obligations, subprime mortgages, and spiking gasoline prices. The “dippy urban planners” complaining about sprawl were right that something bad would eventually happen, but wrong in concentrating on declining water tables and vanishing bird species. Too bad that they didn’t foresee the consequences of real estate greed poisoning the human spirit; and the concomitant effects of greed and over-taxed earthly resources on the human economy. The real-estate based American dream has thus become a nightmare.
Our economy is going to recover, albeit slowly. So this was a warning, a serious warning. Let’s hope that our nation will learn to become a bit more circumspect in its love affair with real estate. Warnings like this usually mean that the next offense could be a game-changer, a game-ender for America as we know it.
Jim,
I think in many places in this blog you have combined some concepts that need to be separated.
First, I think that the main problem with the “real estate bubble” was not investment in real estate per se but the massive hanky panky–outright fraud–that was conducted by some in the real estate business.
In fact, the above situation was so pervasive that some people who are about to be foreclosed on have filed “produce the note” requests. The banks themselves cannot produce the note immediately on the property they are foreclosing on, thus giving the individuals as long as 6 months in some cases to recoupe and save their situation with their property. When a BANK cannot produce a note, it says a lot more about the bank than it does about the individual in foreclosure.
Furthermore, I think that “declining property values, collaterilized debt obligations, subprime mortgages, and spiking gasoline prices” cannot all be lumped in one single classification and blamed on ” ‘dippy urban planners.’ ” Each problem has its own “instigators” and individuals who are responsible for the bad situation in the various areas.
Lastly, I have owned property–my home–for much of my adult life. I think that one must absolutely think long-term with regard to real estate. So, therefore, the main point of buying real estate then becomes cheaper-than-renting living space and a “side” benefit of 20 some years down the line increasing one’s investment several-fold.
Of course, this approach to real estate “investing” requires that people actually SAVE UP a downpayment of at least 20% for whatever property he/she may wish to buy and may be able to show reasonably that one will be able to make reasonable payments, together with paying ahead on the principle.
People are simply going to have to change their habits. In addition recently I heard a program on what “economic level” people considered themselves in–upper middle class, middle class, etc. What kind of nonsense is that? Having the TRAPPINGS of a particular social class, does not mean one actually BELONGS in that class. Not knowing whether one will be able to make next month’s payment on house and/or car does not put one in a social class. Furthermore, I tho’t that “class” was one of the things this country was establised to obliterate.
It seems to me that the concept of “good hard work”, pride in doing a good job at one’s occupation has for too long been a forgotten concept.
Frankly, I sometimes find myself thinking that this bubble that burst may not be such a bad thing in the end. If it gets people back to a kind of “simple” living, a kind of “sensible” living and approach to how our economy works, the burst bubble may in the end prove to be a good thing–a life lesson learned, albeit the hard way.
MCS
Comment by MCS — June 1, 2009 @ 4:37 pm
Jim,
I think in many places in this blog you have combined some concepts that need to be separated.
First, I think that the main problem with the “real estate bubble” was not investment in real estate per se but the massive hanky panky–outright fraud–that was conducted by some in the real estate business.
In fact, the above situation was so pervasive that some people who are about to be foreclosed on have filed “produce the note” requests. The banks themselves cannot produce the note immediately on the property they are foreclosing on, thus giving the individuals as long as 6 months in some cases to recoupe and save their situation with their property. When a BANK cannot produce a note, it says a lot more about the bank than it does about the individual in foreclosure.
Furthermore, I think that “declining property values, collaterilized debt obligations, subprime mortgages, and spiking gasoline prices” cannot all be lumped in one single classification and blamed on ” ‘dippy urban planners.’ ” Each problem has its own “instigators” and individuals who are responsible for the bad situation in the various areas.
Lastly, I have owned property–my home–for much of my adult life. I think that one must absolutely think long-term with regard to real estate. So, therefore, the main point of buying real estate then becomes cheaper-than-renting living space and a “side” benefit of 20 some years down the line increasing one’s investment several-fold.
Of course, this approach to real estate “investing” requires that people actually SAVE UP a downpayment of at least 20% for whatever property he/she may wish to buy and may be able to show reasonably that one will be able to make reasonable payments, together with paying ahead on the principle.
People are simply going to have to change their habits. In addition recently I heard a program on what “economic level” people considered themselves in–upper middle class, middle class, etc. What kind of nonsense is that? Having the TRAPPINGS of a particular social class, does not mean one actually BELONGS in that class. Not knowing whether one will be able to make next month’s payment on house and/or car does not put one in a social class. Furthermore, I tho’t that “class” was one of the things this country was establised to obliterate.
It seems to me that the concept of “good hard work”, pride in doing a good job at one’s occupation has for too long been a forgotten concept.
Frankly, I sometimes find myself thinking that this bubble that burst may not be such a bad thing in the end. If it gets people back to a kind of “simple” living, a kind of “sensible” living and approach to how our economy works, the burst bubble may in the end prove to be a good thing–a life lesson learned, albeit the hard way.
MCS
Comment by MCS — June 1, 2009 @ 4:37 pm