“Unbuilt
homes selling like crazy,” says a headline in USA Today.
“Like
crazy” is how you’d expect to sell something that didn’t exist. Unbuilt houses
are a bit like those dotcoms in the late ’90s that had not yet developed a product
or a business model to exploit it. That people still paid a lot for their shares
was evidence of both the level of craziness in the market and the approach of
its end.
Everything
comes to an end. Ordinary things come to an ordinary end. The craziest things
tend to come to an end sooner — and in a more madcap way.
As
we mentioned yesterday, we are watching a group of epic reversals to the mean.
Throughout the broad sweep of human history, a person in China earned about as
much as a person in North America or in Europe. The Industrial Revolution knocked
the world out of balance. GDP per capita rose much faster in the West than in
the East. But now it is in the East that wages rise — a trend likely to continue
for generations as the extraordinarily high wages of the West regress to the mean.
Another
major regression to the mean we are watching is the U.S. dollar. The prestige
of the greenback rose with the empire behind it. Our guess is that the two will
fall together. Both seem doomed by their own absurdities. Congress passed the
latest Pentagon bill yesterday — a budget of $408 billion. It costs a lot
of money to maintain America’s protective umbrella over the world, even when there
seems little to protect against.
At
the risk of boring long-time sufferers and annoying new ones, we offer a two-sentence
explanation of the world economy, circa 2005, under the reign of George W. Bush
and Alan Greenspan:
Asians
make things and sell them to Americans, who borrow money from their suppliers
(on the inflated value of their houses) in order to continue living beyond their
means. Asians take their profits and either relend them to Americans…or use
them to buy more productive capacity, in America and elsewhere.
(We
didn’t say the sentences would be short.)
For
those who wonder where this trend will lead, we offer a guess: The average American
will be left with a shoeshine kit and instructions on how to say “please” and
“thank you” in Chinese.
•
In the meantime, we await a reversal to the mean in the worldwide real estate
market. Prices have already grown soft in Britain and Australia. A San Diego paper
tells us that American prices will be mushing up soon, too.
“There
is no reason a house should be worth 40 percent more today than it was two years
ago,” said UCLA economist Christopher Thornberg, co-author of a report on the
housing market. “And this housing market is heated far beyond the point of sustainability.”
The
Anderson Forecast predicts California and national economic trends. The latest
report says a drop in the housing market is inevitable…and that it will probably
pull the whole economy down with it.
The
UCLA economists say that today’s level of building is not sustainable given population
growth. They look for fewer housing starts later this year, which will have an
almost immediate effect on the economy. “There’s no stimulus that would push the
housing sector higher,” said Michael Bazdarich, the other co-author of the forecast.
“It would be a miracle if housing just holds these present levels.”
California
has seen home prices increase 81 percent from 1997 to 2005, according to the forecast.
Lately, prices seem to be settling down in some areas.
“We’re
having mediocre employment growth and mediocre income growth,” Thornberg said.
“The type of home prices we’re seeing typically would not be supported by mediocre
employment and mediocre income growth…What we have in California is population
growth of low-skilled immigrants who can’t afford an apartment, much less to buy
a house.”
•
“What’s that noise in the background? It sounds like popcorn popping…”
This
question was posed to your author’s wife about 15 years ago. She was on the phone
with her brother, who wondered what was going on. At the time, we lived in a section
of Baltimore known as Reservoir Hill, an area renowned for its elegant 19th century
houses and its murderous 20th century drug wars.
“Oh…that’s
just someone shooting in the alley,” Elizabeth replied. We had gotten so used
to it, we barely noticed.
We
left Reservoir Hill, selling our elegant 19th-century house for $67,000 —
less than we had invested in it. It was a very nice house, but not nice enough
“to die for.”
But
now we read in the Baltimore press that Reservoir Hill is “hot, hot, hot” in more
ways than one. Statistically, you are still more likely to get shot in Reservoir
Hill than in Baghdad. But mythologically, you’re likely to make more money too.
“The
newcomers are believers. This time it’s different. This time — it’s for real,”
writes Lila Rajiva.
“Dave
is showing me a house on the outskirts of Reservoir Hill which is ‘hot, hot, hot,’
according to the real estate web site where I first saw it. Dave is a broker officially,
but actually, he tells me, he does this because it helps his own investing. He
grew up in Baltimore and then spent ten years in California where he lived through
the dotcom crash. Shortly after, he pulled his money out, clubbed together with
some friends, and started buying property in San Francisco.
“Then
I moved back here,” he smiles wolfishly. “It was dirt cheap compared to SF.”
“…Reservoir
Hill and the fringes were once the home of the great merchants of Baltimore, and
their streets have some of the grandest and most ornamental architecture in the
city. Flourishes of woodwork, imposing marble mantels and floors, elegant spiral
staircases, swirling wrought-iron work. In the 20s, Gertrude Stein once lived
in a mansion here. Then things changed. The residents became absentee landlords,
the mansions were chopped up into apartment blocks, drugs took over, and the neighborhood
fell into the shadows.
“Until
the last three years…”
“Five,
ten, fifteen years ago, those …houses couldn’t be given away. And the landlords
boarded up the windows and let them sit vacant for years, eyesores that destroyed
the neighborhood. I knew an artist [?] who fell in love with one of those beautiful
ruined ghosts and sunk his savings trying to breath life back into it. After ten
years of smashed windowpanes, broken steering wheels, reefers and condoms tossed
into his yard, he gave up, sold for a loss, and went to France. He had vision.
I wondered what he was thinking now.”
What
are we thinking now? We’re glad we got out when we did.
•
Overheard while Addison Wiggin was passing through immigration from Toronto to
the US: “Where’s the price of gold gonna go?”
“Excuse
me?”
“Where
is the price of gold going to go?”
Not
exactly the kind of question you expect when you pass through immigration. We
were on our way back from The Supper Club meeting this week in Toronto. At the
U.S. immigration booth, conveniently located in Toronto’s Pearse International
Airport, the balding and extremely overweight man checking passports popped the
question: “Where’s gold going to go?”
“Umnn…much
higher. Yeah, a lot higher.”
“Is
it going to break $500?”
“Probably
not this year, but…”
“Is
it going to fall below $400 first?”
“No.”
“Good…I
don’t think so either.”
June
24, 2005
Bill
Bonner [send
him mail] is the author, with Addison Wiggin, of Financial
Reckoning Day: Surviving the Soft Depression of The 21st Century.
