For the Week of April 11, 2005
The next U.S. recession will result from a real estate crash.
U.S. residential real estate is overvalued because its purchase is subsidized. It is the only good consumers can buy while writing off the interest. Builders also have a host of tax incentives to build. Most have been in place for generations. While there has been enormous abuse of these tax loopholes over the years they will have nothing to do with what is to come.
The whole idea of a home as an investment needs to be questioned. An empty home does not get more valuable. It falls apart. We have one on my street and, even in today's white hot market, it's falling apart. It won't bring back the investment of the idiot who owns it.
What assets naturally rise in value? Those assets which produce valuable products, and can continue producing them, rise naturally in value. (Not all do, of course. You have to account for the Fiorina Effect, for Barbarians at the Gate, and Cluelessness.) Those assets which are naturally limited in quantity, like land itself, will rise in value over time.
But not homes. And the myth that homes always rise in value needs to die. It will die, sooner than you think.
If you like, call the next crash Clinton's Revenge. It was under President Clinton that the reins were loosed on the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae). These are quasi-private entities created decades ago with a good purpose, namely to let more people buy homes.
But during the Clinton years both agencies morphed into scams. What they do is buy mortgage paper, turn that into a bond, and sell it back to the market. In their zeal to create more paper, and make more money, both have let lending standards lapse. This has caused mortgage lending standards to lapse as well. Even bad loans can be turned into government bonds, so who needs to check to see if the loan is good?
By that I mean you can now borrow 100% of the value of any home. You can borrow money even if the monthly payment is a huge proportion of your take-home pay. You can borrow even if your credit is bad. You can borrow even when you can't afford it.
This fact has bid up the price of real estate around the country, and created a building boom that has sustained the economy over the last four years. It was likely the biggest cause for the Bush re-election. The real estate boom kept the economy afloat when it should have collapsed under the weight of debt and deficits.
There are several facts now baked-into the U.S. economy that make a crash inevitable. Interest rates are rising. Inflation is rising. This means those mortgages on adjustable rates are going to see higher payments, and tip some buyers into bankruptcy. Rising oil prices are also making long commutes increasingly difficult to afford.
When too much inventory comes into any market, either on a local or regional basis, prices decline. And it's these price declines that are the real disaster. Many people in the last few years have bought houses for speculative reasons. Other people have leveraged themselves with second mortgages that will go bad once the value of the underlying asset falls.
The result will be a crack, then a crash. Bonds sold with an assumed government guarantee will go bad, at which point there's no bottom. Add to this new bankruptcy laws that will keep people out of the market for years after they hit the financial rocks and you have the ingredients for a long-term economic collapse.
Something like this happened before, in the 1970s. That was the last real estate recession. Thus most investors, and most homebuyers, have never see one. This loss of memory also exacerbated the 2000 stock market collapse. Prices were driven to unsustainable extremes, and once everyone was in the market there were no new buyers to sustain prices.
The stock market crash did little lasting damage to the U.S. economy because the real estate boom was waiting to replace it. Many people made up for losses in their portfolios by "investing in their homes." Home renovation has been an integral part of the recent boom.
But all booms bust. There is ample evidence that home prices are at unsustainable levels in many markets. Monthly mortgage payments in some markets are higher than market rents. The percentage of income being set aside for mortgage payments in other markets is another sign of excess.
The dot-bust of the last few years was actually fairly localized. High tech centers like California got the worst of it. Some markets will even be spared in the coming crash. The Oilpatch - cities like Houston, Denver Tulsa and Dallas - will ride out most of the storm because houses are easy to build there and employment will keep rising. The same thing happened in the 1970s.
But the amount of speculative overhang here is so vast that even these cities are likely to be touched. And once the bubble bursts all the other debts and deficits plaguing the U.S. - imports and government borrowing and all the rest - all those problems will hit at once.
It's going to be the Perfect Economic Storm. In the movie, the boat sank and they all died.
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Shameless Self-Promotion
I'm now helping to produce a special blog on Open Source for ZDNet.
I work as a freelance writer in Atlanta, and am on the development team for EgoScout, a new kind of mediator for mobile phone users.
My last non-fiction book, "The Blankenhorn Effect" won the Computer/Internet category in the 2003 Independent Publisher (IPPY) awards. Write me for a PDF copy of my latest novel, "Baptists are for Dunking."
On my Mooreslore blog I've written a new novel, "The Chinese Century." It's a story told in real-time, with real characters, but entirely fictional, dealing with the consequences of the falling dollar. I'm beginning a sequal, "American Diaspora," exploring the themes of the first book but with more fictional characters. It's a true alternate history, but set in the present day.
You are encouraged to forward this newsletter widely. And if you have trouble subscribing let me know. Remember: it's journalism that keeps the Clues coming...
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Best of the Week
When Cert looks into the future today, he gets it. He understands where we should be going, and perhaps more importantly where we should not be going, in regards to the Internet,
An IEEE study shows the excesses of venture capital in the late 1990s actually stifled innovation.
The cost of making something good is directly proportional to the complexity of the tools needed to create it.
What might a proper telecommunications policy consist of? It's really quite simple.
Qwest is playing the game Wall Street wants it to play. That game is predicated on the assumption that there can only be a few big "winners" and everyone else is a loser.
What's more interesting to me is the tug of war now taking place among entrepreneurs between these two technologies. And, surprisingly, cellular is losing. The reason has to do with business models and open standards.
Here at Corante, we're getting heavily into Podcasts. But there's more to podcasting than just iPods.
The prerogatives of these corporations and their hirelings, who call themselves journalists (then deny this status to you and me) is under threat on this medium as never before. They're scared, and they're playing Hardball.
Here is the problem I have with special pleading. Anyone can do it. But once we let one do it, all do it.
It's one of the great laws of politics. As soon as people decide you have power, and you can be moved, everyone and his auntie is going to try and move you. I hinted that something might be happening more than a month ago, but it was probably the controversy over Google News that tipped it over.
Of all the things that Gator (and its ilk) did, the worst may have been how they corrupted the file download process. Click download and you get...who knows what?
At the heart of the First Amendment is the idea that you don't need a license to do journalism. Now, in the name of fighting competition from a new technology, some journalists are calling for just such a license.
The studios have already lost. The court cannot make file transfers illegal. There are too many ways to transfer them. They can be transferred in e-mail attachments. They can be transferred through Instant Messaging. They can be transferred via MMS. File transfers are basic to networking. Without the ability to transfer files we're down to typing.
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The American Diaspora
ZDNet Open Source
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Clued-in, Clueless
Clued-in is Vint Cerf He gets it, he really gets it.
Clueless is David Shaw of the LA Times He's like Metallica in the Napster case, the House Nigger.
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