Thursday, June 16, 2005
Wow. All kinds of wonderful but surprising stuff being printed these days.
. . .
DON'T PANIC seems to be the message here. The problem is that while they have the underlying numbers right, they view the problem in isolation. They both insist prices can't/won't drop because they've never dropped, or only twice in 40 years both times during a recession.
Well guess what happened to home prices during the great depression? So that's 3 times, at least, in 100 years. Yes, home prices can and have dropped. They generally don't because 'they aint making any more' as the saying goes, but when prices have been wildly inflated and buyers are suddenly unwilling... A drop in home prices is sticky downward, meaning a bust lasts longer and goes deeper than other kinds of markets.
Both articles also ingnore the fact that housing makes up a huge chunk of the economy today. All those realtors, all those tradesmen, all those contractors, all those builders, all those Home Depots, what happens to them? What happens to the overall economy if that huge sector just flattens, much less contracts?
Consumer spending makes up something like 2/3 of our GDP. Will consumers be spending if their mortgage payments jump 30% with rising interest rates? Will consumers be spending if they suddenly owe $200,000 on a house that can only sell for $150,000? Will consumers continue to assume new debts, even barring any market disruption, once the new bankruptcy laws go into effect?
All signs point to a global recession. (Rather, we've been in one but the housing market has masked it.) How can we expect the economy to grow when residential construction accounted for over 12% of average yearly growth since 2002? How can we expect the economy to grow when Greenspan retires in January? How can we expect the economy to grow when oil costs $55 a barrel? How can we expect the economy to grow when each taxpayer will have half a retiree to support in a decade? How can we expect the economy to grow with GM, Ford, United Airlines, and Northwest Airlines ready to go under because of underfunded pension plans?
(It's social security in the private sector. The pension managers decided that since the money was obviously going to continue to grow like it had been during the 90s, they didn't need to invest as much money. Surprise, the company can't make the payments that it promised the workers. So either they cut payments or they go under. A court ruled that GM couldn't cut payments, so they're laying off 25,000 workers and discounting their entire inventory to the fraction-above-cost they charge employees. [Thus, destroying the resale value of all their products and burning brand-loyalty.] A sneak preview of what's in store for all of us.)
So what happens to all these older folks when their pensions and social security shrink? Do they unload the lake place, flooding the market and further diluting the value of the asset that was going to fund their golden years? Do they go back to work or keep working, just when job growth and unemployment will be most fragile?
Insisting that housing prices can't decline on the basis of past performance is both ignorant and foolish. History shows that home prices can drop by more than 90%, depending on external circumstances. Things start to get really dangerous when people have been treating anticipated appreciation as the majority of their net wealth and spending the rest.
Past performance is one of the few guides we have when anticipating future performance, but it seems to me that a huge swathe of the country are behaving as though it were as certain as nuclear half-life rather than a coin toss. Why does the median home cost $17,000 more this year than last year? Did wages rise that much? Did rents rise that much? Your home is only worth $300,000 if you can find someone willing to pay it, otherwise its value is in its function.
DON'T BUY AT THE TOP OF THE MARKET. That's the most basic investment advice you'll ever get. Once you're hearing about the new thing, the potential for huge profit is likely already gone. If you're not willing to pay attention and move your money, you'll never be in the right place at the right time.
Just to convince you all that I've gone entirely round the bend, do you know how financially solvent your bank and insurance companies are? If you don't expect the government to be able to handle social security obligations, how do you expect them to handle FDIC deposits for all the banks holding those wildly inflated mortgages?
. . .
. . .