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Wednesday, January 23, 2008

America as Beavis
Posted by Jill | 6:27 AM
Remember the episode of Beavis and Butthead in which the two dimwits are working in a fast food restaurant? Beavis sticks his hand into the fryer, yells "Ow!" as he pulls it out -- and sticks it back in again?

We Americans are like Beavis, in that we have short memories. The American optimism is often born of nothing but, well, American optimism. And so, just a few years after the dot-com boom and crash, we started it all again, this time with residential real estate.

I've never understood how anyone could think it would go on forever. In 2005, I would look around my living room, with the ugly but amazingly still intact (it's wool) red carpet that the previous owners of the house decided was attractive, and I'd look at my kitchen, with its hideous yellow geometric vinyl floor, and my 1970's basement family room with the dark paneling and rust-color carpet, and think "Who the hell would pay $489,000 for this?" But in 2005, if we had wanted to sell, that's the price at which we would have been able to list. I'm sorry, but any rational mind would realize that nearly a half-million dollars for a "POS cape" in a not-top-tier town was just insane.

And yet the rational mind seemed all too often to just fly out the window, as people tapped home equity for expensive vacations and more SUVs than there were drivers in the house, and that's on top of the additional 2000 square foot add-a-levels and the gourmet kitchens with Aga cookers that no one ever used, except to dish out the greasy Chinese takeout from the strip mall.

And just like the 1920's, and the 1980's, and the late 1990's, no one ever thought it would end. But it has. Because we never learn:

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage. That helps explain why problems in the American subprime mortgage market could have spread so quickly through the world’s financial system. On Tuesday, Mr. Bernanke, who is now the Fed chairman, presided over the steepest one-day interest rate cut in the central bank’s history.

The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback. Martin Feldstein, the éminence grise of Republican economists, says he is concerned that the economy “could slip into a recession and that the recession could be a long, deep, severe one.” In Monday’s Democratic presidential debate, Barack Obama made the same argument: “We could be sliding into an extraordinary recession,” he said.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

The second problem is that real estate and stocks remain fairly expensive. This shows just how big the bubbles were: despite the recent declines, stock prices and home values have still not returned to historical norms.

David Rosenberg, a Merrill Lynch economist, says that the stock market is overvalued by 10 percent relative to corporate earnings and interest rates. And remember that stocks usually fall more than they should during a bear market, much as they rise more than they should during a bull market.

The situation with house prices looks worse. Until 2000, the relationship between house prices and rents remained fairly steady. The same could be said about house prices relative to household incomes and mortgage rates. But the boom of the last decade changed this entirely.

For prices to return to the old norm, they would still need to fall 30 percent across much of Florida, California and the Southwest and about 20 percent in the Northeast. This could happen quickly, or prices could remain stagnant for years while incomes and rents caught up.

For those of us who didn't answer the siren song of home equity loans, we should be all right provided we can hang onto our jobs. But there are any number of people who are going to be foreclosed right out of those gourmet kitchens because their Wall Street jobs have been eliminated and they tapped so much equity that they now owe more than their homes are worth; and that's on top of those who would never have qualified for a mortgage under normal circumstances, but succumbed to sharp-talking lenders who convinced them they could have a piece of the action.

I remember in the 1980's, during the last real estate speculative bubble, when friends were all grabbing houses at inflated prices and telling me it was a great time to buy -- even though the money for a down payment wasn't there. I longed to have a house, but just couldn't afford it. And then I saw friends sell at a loss one step ahead of foreclosure. I'm in possession of one friend's grandmother's stemware, bought at their scrape-together-the-cash-for-the-closing garage sale after she sold at a loss, because I felt at least someone she knows should have it. So it's hard to feel a whole lot of schadenfreude for those who succumbed (extent to the extent that they look down on my ugly kitchen, of course). Because ultimately, those poor decisions are going to affect all of us. Because sometimes good old American optimism allows us to get things done or come together during a crisis. And sometimes American optimism is just delusion.

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Blogger Bob said...
I knew a woman who bought a three apt frame house in Rahway at 80s inflated prices, made no improvements, snorted a sizable part of her paycheck up her nose, was was headed into foreclosure. She was paying for heating oil cash on delivery whenever the tank ran dry. She was so desperate to hang on a little longer that she rented me a livable apt for $300, saying I'd probably be there only a year. I was there three before the sheriff finally came with the eviction. Her life totally tanked after that. Someone bought the house cheap, fixed it up, it's beauty now.

Anonymous Anonymous said...

I really must question the statement that "Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, ...". That may and probably is true of some first time home buyers [we know that 'financial' training is non-existent in American schooling], but if it is even marginally true of Wall Street CEOs, then the Harvard MBA is even a bigger ripoff than a subprime mortgage.

The CEOs knew _exactly_ what they were doing. And if they didn't should have been fired long ago! [I complement them for holding off the disaster as long as they could, but they had a serious incentive not to let the gravy train derail!] _They_ -- and their board members, top VPs, connected politicians, etc -- got rich[er]; they got their bonuses; and they dumped their overhyped IPOs before they tanked. There was absolutely nothing about this bust that they did not understand or forsee. And a few even "took their lumps", their bonuses, and their island vacation houses and slunk off into the sunset. Want to bet how long they'll be "unemployed"!?

As for your other question: Housing prices are -- and have been for some time -- DIRECTLY PROPORTIONAL to their distance from NYC. Why so many people are willing to [over]pay so much for the privilege of living [t]here, I have never known, but since I'm only 62 miles [as the crow flies!!] from Manhattan I need to examine my own motives...

But houses -- even the almost identical house -- are nowhere near as expensive in Dallas, Minneapolis, StLouis, Raleigh, ... Why? Are those areas LESS desirable than NY? Are jobs less available? Are the people who live there SMARTER in some monetary sense and refuse to overpay? I've always thought that salaries are higher in the NE than elsewhere because companies have to pay a premium to make people live here.. Not sure that totally applies in places like South California, but they have another dynamic out there!

I'll leave you to ponder that as you [we] stare at the ugly worn carpet and kitchen in need of "refreshing"!

Blogger Maya's Granny said...
As a single mother working in non-profits, I've never had enough money to buy a house. Until recently, when a couple of sub-prime lenders tried to talk me into it. Luckily, although I've always been unable to spend, I haven't been unable to learn. I've read about bubbles and knew that one was due with the dot.coms and with the housing market. I knew enough to keep my 401K in bonds when all my co-workers thought they were getting rich in stocks. And to continue to rent when the temptation to own a house, which I would like to do, was being waved in front of me. And, I'm not even really interested in economics. Just in history.