Deaf or Mad

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So many bells are ringing on the U.S. housing bubble we think we may go deaf. Or mad. The latest toll comes in the May edition of Playboy magazine. We haven’t seen this ourselves, but we have it on good authority that the Playmate of the Month, Jamie Westenhiser, says she is abandoning a promising career as a model in order to “take up real estate investing.”

What would make a nice girl like her end up in place like that? Maybe it was the 12.5% gain in real estate in the last 12 months? How about a 50% increase in housing prices, nationwide, in the last five years? In hot markets — such as California, Florida, and Washington, DC — prices have risen 60% in the last two years.

It’s a “real estate gold rush,” says the cover of Fortune magazine.

Americans are suffering from delusions of mediocrity, we believe. They take for normal what is actually extraordinary.

Prices of American residential real estate, in real terms, are up 66% over the last 114 years, says our friend Tim Price in MoneyWeek magazine. But all the increases happened in just two brief periods: right after WWII and since 1998. Other than those two periods, the real price of housing was either flat or falling. And the big difference between the period following WWII and the present era was that back then the U.S. economy was growing and healthy. America had not only a positive trade balance, but the most positive one in the world. Wages were going up, so people could afford more expensive houses. Families were expanding faster than the economy — so they needed more houses too.

But now, families are getting smaller. Incomes are stable or shrinking. The nation spends more than it earns; it desperately counts on rising house prices just so it can continue living beyond its means. Lenders come up with creative financing to permit themselves to lend money to people who can’t pay it back. Houses in some areas are already so expensive that barely one buyer in ten can afford a median-priced house. And Playmates of the Month are giving up strutting their stuff in order to invest in real estate. This is not a normal situation. It is preposterous and asinine.

There may be more profit to be squeezed out of America’s Great Real Estate Bubble but Daily Reckoning readers are cautioned to leave the last of it for others — namely, the foolhardy and the brain damaged. Don’t expect to wait until the last minute to sell property you bought as a speculation…or property you don’t really want to own. You won’t know when the last minute comes. Property bubbles end with such a little whimper, you hardly notice. People put their houses on the market. As far as they know, buyers are still standing in line. Then, they notice that the buyers have disappeared.

• In London, the real estate bubble started losing air last summer. According to the paper, it is still not clear what is happening. Fewer properties are selling, at lower prices, but many think it is just a lull.

A friend of ours put her apartment in central London up for sale last fall — hoping to get out at the top. In two months, she says, only one person looked at it — a crazy woman from the same building. So, she gave up and took the place off the market.

Her failed sale is almost invisible. Sellers are reluctant to mark down prices. They can’t believe that the market has changed direction. Instead, they expect buyers to come back. Prices don’t fall quickly. But the inventory of unsold properties builds up. Houses are unlike stocks in that it costs something to own them — taxes, insurance, heat, and maintenance. As the slump continues, owners must keep digging into their pockets to pay the monthly costs. And they are still unsure what is going on. Then, stories begin to circulate. Marginal owners become desperate; they cut their asking prices sharply to unload properties. But people still do not expect a prolonged bear market. Buyers with cash take advantage of the ‘bargains’ that come on the market. People are still optimistic and hopeful.

The property boom in the U.S. has been around for nearly 8 years. It might take just as many years for the bubble to deflate. For leveraged investors it can be a long, painful time.

• “Construction spending hits record high,” says a Reuters headline. What the headline describes is the “growth” in the U.S. economy. People are spending money they don’t have on things they can’t really afford — notably, things with windows and doors. They think they are richer; they see the new granite counter-tops and the marble shower stall. But they have actually gotten poorer. They’ve put themselves into debt just in order to increase their consumption. The faster the economy “grows,” the poorer they get.

• The Dutch drove another spike into Europe’s heart yesterday. Hopes for a strong central government bled out on editorial pages all over the continent. In America, meanwhile, the vote was seen as more proof — if any were needed — that Europe still “can’t get its act together.”

Seems almost impossible to believe but Americans once celebrated the virtue of not having a strong central government. But that was a long, long time ago…and not worth mentioning.

Switzerland has no strong central government. Can anyone name the president of Switzerland? Not even the Swiss could do so. What a lovely country; blowhard politicians barely make the papers. Nor is Switzerland part of the European Union. The Swiss have wisely decided to keep to themselves. We don’t notice them suffering from it too much.

• We went to the National Theatre on Tuesday night. We saw an excellent lighthearted farce based on the old movie with Vincent Price — Theater of Blood.

Many of the plays put on in London are not very good. Many are simply empty spectacles, designed for tourists and gum-chewers. But the theatre is also still recovering from a lamentable 20th century tendency towards social commentary and method acting. The playwrights — such as Shaw, Williams, Miller, all the Scandinavians and Russians — seemed to want to outdo each other to see who could present the gloomiest view of domestic life. The players act as though they are announcing their own suicide every time they say, “Please pass the salt.” And viewers come out depressed, usually asking for a divorce or a rope on their way home.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.

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