In addition, I like to think that my ability to uncover interesting stories and identify interesting sources of insight about what is really going on the world is also a draw. With that in mind, I'd like to highlight another of the blogs on my list of regular must-reads: Of Two Minds.
OTM is published by writer Charles Hugh Smith, who was serving up sagacious commentary on the shaky state of the financial realm well before I published my second book and created this blog nearly two years ago. Smith is also the author of a fascinating new book, Weblogs & New Media: Marketing in Crisis, which explores the issue of marketing in a dramatically changing business environment.
The thesis stated again and again in the mainstream media (MSM) is that the U.S. economy can't get back on its feet until housing "recovers"--which makes the question "when will housing recover?" of paramount importance.
The reasoning is simple: for the vast majority of middle-class households, the equity in their residence represents a major chunk of their wealth. When housing was skyrocketing in value, homeowners felt wealthier and thus they spent freely, even if they doidn't extract the equity via HELOCs (home equity line of credit). That's called the "wealth effect."
Now we have the "reverse wealth effect." As equity has declined--in millions of cases, to negative net worth--homeowners feel poorer and thus they are spending less. Since equity extraction, which once flooded the economy with hundreds of billions of "free money" year after year, has now shrunk to near-zero, they also have less money to spend.
As we can see in the chart (not shown here), household real estate wealth is set to decline for the first time in 50 years. Financial wealth is also set to go negative, an unprecedented (in post-WW2 era) double-whammy to household wealth.
Construction, remodeling, home furnishings, real estate financing and sales together make up a big percentage of the U.S. economy. As each of these components shrinks, the toll on the U.S. is huge.
OK, so isn't housing set to "rebound" next year, or in 2010 at the latest?
No. For as correspondent Pangolin notes, while mortgages may just be paper, the paper is based on real physical houses and neighborhoods. the "paper losses" are hitting the real houses and neighborhoods hard in four ways: Depression, Demographics, Defaults and Dumps.
Here are Pangolin's incisive comments:
Is it me or we all ignoring a fifth elephant in the financial living room? All of this debt is secured by assets, houses, on land, that were built with the presumption that well-employed people would live in them at about the ratio of 2.6 people per 2500 sq. feet. (sources: U.S. Census 2006, Square Footage Measurements and Comparisons Energy Information Administration)
That's a lot of volume for two people and when our various cousins, brothers, mom's, sisters and best friends lose their steady jobs that's a lot of space to rent or share. This is especially significant if other, non-optional expenses like food, heat and medical care continue to get more expensive. Meaning the occupied number of residences in the US could contract by a third overnight with little hardship.
Think of one fourth of the buildings in a neighborhood vacant and you have a place begging for scavengers to come and remove the rest of the neighborhoods property value. I tell you as a fact a crew of three guys can strip a house overnight and leave the neighbors clueless. Appliances, wires, pipes and fixtures gone; boom. They'll do it in contractors vans and they'll show you a printed work order. Easy as pie. In ten minutes an arsonist can be in and out and the place won't show a flame until it's too late hours later.
If somebody's not living in the house next door you, as a homeowner, now have a permanent source of worry; real big worry.
Some time soon homeowners (as opposed to mortgage paying tenants) are going to descend on local governments in a wrath and demand that vacant properties be occupied or maintained in a reasonable standard. Lawsuits will pile up, HOA liens will fly like fall leaves and town councils will get slapped awake by irate citizens.
Then there will be a proliferation of proposal that will amount to "use it or lose it" laws. Your vacant property may be seized, sold at auction for cash on the barrel-head to anybody who can demonstrate that they will a) occupy the property and b) have sufficient income/reserves to maintain it. There is nothing at all that makes this illegal. To the contrary laws have been adjusted to allow crony capitalists to seize property and build baseball stadiums, mini-malls and 'factory-outlets' with minimal fuss. It's also quite simple to tell a besieged banks legal department that the value of the property is exactly it's auction price in lieu of evidence of other buyers.
For several years banks will scream murder and property prices will dive but nobody is going to leave an empty house in their neighborhood if they can avoid it.
