It\u2019s starting to look as though our nation\u2019s 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\u2019t start until sometime in 2010. <\/p>\n
We\u2019ve just gone through the biggest economic drop relative since the 1930s. It wasn\u2019t expected, it came on suddenly, and has done a lot of damage that will take much time and many resources to fix. <\/p>\n
The big lesson, I think, is that real estate bubbles are nasty things; and maybe that\u2019s 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\u2019t 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. <\/p>\n
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\u2019s about where we are right now.<\/p>\n
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 \u2013 more tulips! <\/p>\n
By contrast, a real estate bubble, along with all the crazy financial machinations that prop it up (currently known as \u201ctoxic assets\u201d and \u201cdefault swaps\u201d), don\u2019t leave you with much. There\u2019s 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\u2019t 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 \u201cfast-money\u201d developers), they will probably have negative ecological consequences in coming years. <\/p>\n
Personally, I\u2019ve 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\u2019t welcome in the neighborhood, etc.). Nonetheless, real estate ownership is a key component of \u201cthe American Dream\u201d; 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 \u201cFounding Fathers\u201d. 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.). <\/p>\n
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 \u201cdippy urban-planner types\u201d had been complaining for many years about the environmental evils of \u201csuburban sprawl\u201d. 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\u2019s 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 \u201cthe dream\u201d. <\/p>\n
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 \u201cdippy urban planners\u201d 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\u2019t 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. <\/p>\n
Our economy is going to recover, albeit slowly. So this was a warning, a serious warning. Let\u2019s 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.<\/p>\n","protected":false},"excerpt":{"rendered":"
It\u2019s starting to look as though our nation\u2019s 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 […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,23],"tags":[],"_links":{"self":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/190"}],"collection":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=190"}],"version-history":[{"count":2,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/190\/revisions"}],"predecessor-version":[{"id":1740,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=\/wp\/v2\/posts\/190\/revisions\/1740"}],"wp:attachment":[{"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=190"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=190"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jimgworld.com\/blog1\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=190"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}