Gaga Over Real Estate

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"Why we’re going gaga over real estate," is the headline on this week’s Time magazine.

The only reason the Time’s reporter gives for the real estate mania is — because it is going up in price. The report is not unlike a love story written by a priest with no imagination; he has left out the exciting parts.

"I saw so many of my friends and colleagues getting rich," Time quotes one speculator, "I wanted to get rich too."

All over the country, houses are flipped, fixed-up, sold, torn down, rebuilt, refinanced, and flipped again. Lenders, builders, agents, speculators, and people who put in granite countertops are all getting rich. One day a house sells for $150,000… two years later, it has risen to $250,000.

"I bought a house in Gaithersburg, Maryland, just two years ago," said a young colleague yesterday. "I paid $400,000 for it. Now, they’re selling for $600,000. I made $100,000 per year. Actually, more than that, because I mortgaged most of the purchase price."

Isn’t it amazing that an inert object — a consumer item — can become so much more valuable in the space of a few months, even though it has not really changed? The question never seems to occur to Time or anyone else. People may be going gaga over real estate, but what has happened to the real estate market to cause them to lose their minds?

Here is where the priest blushed and lowered his pen. He decided to end the story there. Too bad, because here is where the tale turns a little steamy… and even sordid. Here is where we find out the original sin that engendered the rise in real estate prices.

Today’s news reveals nothing very interesting. Day after day, stocks go nowhere. They have barely moved for the last few weeks. The Dow is neither higher nor lower than it was eight years ago.

The euro did not rally as we expected; at least, it has not rallied yet. Instead, it sinks. Your vacation in Europe will be less expensive than it might have been, but still probably more expensive than you expected. The euro has gone down, but only to $1.20.

Gold did rally, however. People with wealth are probably getting a little wary of both paper currencies — the euro and the dollar. Yesterday, gold went down, but was still $4 above our $425 buying target.

None of this is very exciting, so we step back… back… and back some more, until we practically fall off the stage… in order to get a view of the bigger picture. The world is flooded with two things: money and labor. There are 3 billion people in Asia who are entering the globalized labor pool. Politicians can rant and rave all they want; there is no escaping this downward, deflationary force in the cost of labor. That is a large part of the reason why real labor rates in America are going down.

We pause a moment to ponder two questions: How can people who earn less money afford more expensive houses? And how is it possible that the world’s most flexible, dynamic and successful economy actually makes its typical citizens poorer over a quarter of a century? We ask both questions out of mischief, not curiosity. We already know the answers: They can’t and it isn’t.

• Now we turn to the second thing with which the world is flooded: money. The "glut" of labor is cutting prices — directly, for labor itself, and indirectly for the things people make and do with labor. But the "glut" of money and credit — thanks largely to the Federal Reserve — pushes prices in the opposite direction. For the present, the two forces barely meet. Chinese-made goods fall in price, while house prices all over the planet rise. How long this will last is anyone’s guess, but that it won’t last forever is certain.

Since we are bending over backwards to get a good view, we squint to see where this might lead. Surely, real prices on things that can be made and shipped are bound to fall. But nominal prices on things that cannot be easily duplicated are likely to rise — perhaps sharply.

Reader Rolf Hackmann wrote a new book, Globalization, and reading it, you get the feeling that he must have better vision or a more distant perch. He sees "a prolonged decline… [including]… crushing competition… falling prices, profits… high levels of unemployment… business and consumer bankruptcies… deflation of asset values… trade wars… major reductions in white- and blue-collar workforces… rising long-term interest rates… perverse valuation bubbles coexisting with the generally weak economic conditions that seem poised to add more capital destruction and malaise coming from their inevitable implosion. Japan is setting an ominous example."

None of this occurs to Time editors… or to the real estate speculators… or to the lumpinvestoriat in general. As far as they know, the real estate boom came into the world by some sort of immaculate conception — untainted by the lust for easy money.

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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