by Gary North
The greatest real estate deal in man's recorded history was the sell-off of the Louisiana Purchase by the U.S. Government, beginning after the War of 1812 ended in 1815, when the Mississippi River's outlet into the Gulf through New Orleans was assured. For about $1.25 per acre, immigrants could buy land. They did not even have to pay cash.
Most of this land was fertile. Transportation costs were low and then got lower. The Mississippi River, the great lakes, the Erie Canal, and finally the most revolutionary invention of the nineteenth century, the steam railroad, converted 800,000+ square miles of raw land into high-value, mostly family-owned capital. Jefferson thought it would take centuries to fill the American heartland. It took less than a century.
Politically, this shift was reflected in the substitution of Ohio for Virginia as the home state of presidents. What had been the Old Northwest in 1787 became the center of the country by 1887.
Nevertheless, New York City's financial dominance and New England's educational dominance produced a coastal view of America. The communications system, the roadways, and the movies added California to the East Coast's cultural dominance. Yet the accent of California remains the Ohio accent. This is also true of the movies and television.
With the steady decline of the number of people employed in manufacturing after 1950, the Midwest lost its economic clout. This decline included the political clout of the industrial trade unions. The steel belt became the rust belt.
The heartland lost the best and the brightest to the coasts. This was a crucial factor in the comparative decline of the region. Brains moved east or west, where there seemed to be greater opportunities.
Today, this process has begun to reverse. The establishment media, being coastal, have ignored it.
Meanwhile, the South has become integrated economically into the heartland. Air conditioning and the low political power of trade unions in the South combined to make the region acceptable to entrepreneurial immigrants from above the Mason-Dixon line.
Then came national retail chains after 1970. You cannot tell where you are on Main Street anywhere in the country. They all look alike. America's homogenized culture has overwhelmed every region. This has reduced the culture shock of a move into or out of a region.
One major barrier remains: the cost of real estate. As in 1850, heartland America has the edge: the lowest cost prime real estate on earth.
WHERE OPPORTUNITY LIES
Prime urban real estate around the world is now beyond the reach of the next generation of home owners. Government subsidies to the real estate market in the form of loan guarantees and central bank inflation have combined to create demand for urban real estate. In the world's largest cities, anything that we would regard as comfortable, middle-class living can no longer be purchased by members of the middle class who do not already own real estate to sell to first-time buyers.
The heartland is not where most people have preferred to live. Cold weather and a more traditional lifestyle for eight decades failed to attract the best and the brightest. The up-and-coming urban professionals moved to the coasts.
The coastal regions filled up with opportunity-seekers.
They bid up the price of real estate after 1960. Today, their grandchildren are locked out of the housing markets.
The U.S. government responded politically to that age-old desire to "own your own home." The government subsidized the creation of low-down payment mortgages. This enabled home buyers after 1950 to lock in 30-year mortgages, which they paid off. Now they are selling to late-comers. The effect on housing prices of government-insured lending institutions that issue mortgages is analogous to the effect of Medicare on health care prices: upward.
First-time buyers are becoming debtors to the tune of $500,000 to $700,000 in places like Boston and Southern California. They are locked into 30-year mortgages for the rest of their lives. They will pay 40% of their after-tax income to buy their homes.
Family by family, their children will either move out of the region, or else find themselves strapped with lifelong debt, forced to live as dual-income status for the rest of their lives.
This is good news for entrepreneurs who own profit-seeking day cares (www.demischools.org). For everyone else, it isn't.
Whenever there is a recession, thousands of these debt-burdened home owners will be forced to abandon their homes. Their credit ratings will suffer. They may be in debt for $100,000 or more after their homes are sold out from under them in a foreclosure. Bankruptcy will become their only option.
My son Scott recently moved to Southern California. He and two others rent a 3-bedroom townhouse for $2,100/month. He tells me that because of the high price of owning a home, rentals stay on the market for only a few hours. You need to call to rent as soon as you see an ad.
Newcomers in his age bracket — under age 30 — who don't earn $60,000 a year are locked out of home ownership. This makes the two-income family a necessity in most cases. The single-income family is a thing of the past in the housing bubble regions.
My daughter bought a 2100 square foot house in Nashville for about $170,000. It has a decent sized back yard. In a comparable neighborhood in Southern California, that house would sell for close to $700,000.
The difference in price is not based on regional income levels. People in Nashville don't earn a third to a quarter of what people in Southern California do. The difference has to do with the concentration of population. People are paying heavily for weather and lifestyle. But the warm weather and lifestyle are now overwhelmingly based on massive lifetime debt.
High taxes and extensive government regulation in California and New York and Massachusetts are steadily reducing the level of economic opportunity. Nevada is booming — an escape hatch from the tightening grip of government across the border: no income tax. New Hampshire serves the same function for people who want to escape the People's Republic of Massachusetts: no income tax, no sales tax.
We know from the real estate mania on the coasts that, with respect to property values, there is a lot of upward potential in the heartland. People are willing to indebt themselves in every region. No longer is the old "25% of income" rule operational. Yet heartland real estate is still obtainable by honoring the old rule. The difference is the decentralization of population in the heartland. The distribution of population is much greater. The price of land has not been bid up to such a degree.
Now telecommunications are allowing residents of the heartland to make incomes comparable to those on the coasts. This is creating economic opportunities for young families. Women can work at home. Husbands can earn higher salaries. Entrepreneurs can hire well-educated locals and recent immigrants from the coasts. What took place in Austin, Texas, from 1985 to 1995 is indicative of what can happen in a decade: from an oil economy bust to a digital economy boom.
The upward pressure of population is relentless.
There are over 300,000,000 people in the United States. This will go to 400,000,000 by 2050. If these newcomers want to own their own homes, they will have to find less expensive places to live — in Texas rather than California or Phoenix.
YOUNG FAMILIES WILL MOVE INLAND
Young people want to own their homes. This is not going to change anytime soon. They will move to regions where they can afford to buy a home. They have been doing this since approximately 1640.
As American families grew smaller after 1957, the links to existing regions grew weaker. For a century, people moved to Southern California, just as they had moved to New York City. Their children did not move away from the parents and siblings. But now they must leave family behind if they want to own their own homes.
The price of entry-level housing in Southern California is now limited to Hispanics, who are willing to put more than the immediate family into the same home and share mortgage costs, and to highly successful two-income families, especially Asians.
If you don't understand this, spend ten minutes on www.Realtor.com. Look up any zip code in Southern California. Start with Anaheim: 92802. It was mostly orange trees in 1950. Then came Disneyland. Begin with homes in the $400,000 range. Check the square footage.
One of the most astute commentators on this major demographic shift is Joel Kotkin. In a recent article in "The American Interest," titled "Little Start-Up on the Prairie," he describes Aurora, Nebraska — population 4,500.
With its neat town square and red-brick civic buildings, it suggests a reflection of America's bucolic past. Yet it may also represent an oblique looking-glass glimpse into America's future. In the first half of the 21st century, as the nation grows from 300 toward 400 million people, Aurora and other places in the American Heartland will provide a critical outlet for the restless energies and entrepreneurial passions of its people.
As I read it, I thought of the article written by America's most detail-conscious social observer, Tom Wolfe. He wrote on the origin of Silicon Valley. The pioneer was Robert Noyce of Intel, who grew up in Grinnell, Iowa. Noyce brought the Protestant ethic of his youth and his college years to Silicon Valley.
When they were in their teens, Noyce and his brothers made their pocket money by mowing lawns, raking leaves, and babysitting. In Grinnell that was socially correct behavior. To have devoted the same time to taking tennis, golf, or riding lessons would have been regarded as a gaffe of the genus Conspicuous Indolence. There was no Country Club set in Grinnell or anything approaching one.
Wolfe's main point was that in the Midwest, engineering was respected. This was not the case "Back East," where pure science and the humanities were fashionable. This was an aspect of European snobbery, Wolfe said.
As a result, the way to today's Information Superhighway, more recently known as the Digital Revolution, was paved entirely by geniuses from the Midwest and farther west. The inventor of the lightbulb, which started it all, was Thomas Edison from Port Huron, Michigan. The inventor of the vacuum tube, which made possible the development of the high-speed electronic computer, was Lee De Forest from Council Bluffs, Iowa. The three engineers at Bell Laboratories who won Nobel Prizes for inventing the transistor, which replaced the vacuum tube, were John Bardeen from Madison, Wisconsin, Walter Brattain from Seattle, Washington, and William Shockley from Palo Alto, California. The chief of the fabled Bell Labs in those palmy days was Oliver Buckley from Sloane, Iowa. The two inventors of the integrated circuit or "microchip," the very heart of the Revolution, were, first, Jack Kilby, from Jefferson City, Missouri, whose chip was made of germanium, and, six months later, Noyce, whose chip was made of silicon and became the standard for the industry and gave the Silicon Valley its name.
Wolfe is wise enough to know that Asians are pioneers in engineering in Silicon Valley. They are from Way Back East, whose outlook is more Iowa than Massachusetts. But the cultural atmosphere created by Noyce and his team made their entry into the ranks of the creative engineers far easier.
The brains moved to the coasts, especially California, after World War II. This process is now reversing, according to Kotkin.
Low electrical costs, access to Interstate 80 to Omaha and Lincoln, and excellent high-speed telecommunications make Aurora a desirable location for several growing businesses. So, too, does a reliable, literate and highly trainable workforce. . . .
Unemployment barely exists, and the biggest problem — as in many other places in the Heartland — is finding new workers.
The establishment media do not perceive what is happening, Kotkin says. This is not surprising; the establishment media are coastal.
Most media coverage portrays a kind of Mad Max environment — a desiccated, postmodern, Lost World of emptying towns, meth labs and militant native Americans. Typical was a 2006 New York Times article describing North Dakota as "Not Far From Forsaken." Its imagery was of "irresistible decline" — dying towns, aging populations, a place for the curious Easterner to visit now before it all blows away. . . .
If there is anything positive, according to such accounts, it lies in the hope that much of the country between the Mississippi and the Rockies might end up as a giant enviro-playground, subsidized by environmentalists like Ted Turner.
This image is mostly bunk, according to Kotkin.
Restoring the natural environment where possible is no doubt a good thing, but many places in this vast swath of the country also are rebounding in terms of jobs, population and income — in many cases more so than parts of urban coastal America. Fargo, North Dakota, for example, grew by more than 20 percent between 1990 and 2000. Scores of other Heartland towns and cities — Sioux Falls, Des Moines and Bismarck among others — have seen similar expansions.
He calls this micropolitan growth. It is where most of the growth is nationally. This is reasonable; anything large reaches its limits to growth. The rate of growth slows.
Indeed, as we look at the fastest job growth in the country, micropolitan areas are fairly dominant: Of the 393 fastest growing regions in the country, fifteen of the top twenty were micropolitan areas, while only one, the sprawling city of Las Vegas, ranked among the fastest job-growing metros in the country.
Beginning in the 1970s, migration reversed. This has received little attention. This has accelerated since 1990.
A decade ago, Fargo was a classic backwater, and, after the release of the eponymous movie, something of a national joke. A critical shift occurred in the late 1980s when Doug Burgum, a local boy from nearby Arthur, moved back home from Chicago to join a fledgling local start up called Great Plains Software. Burgum recognized the area's considerable engineering expertise, both from North Dakota State University and a large and expanding specialty farm equipment industry, and he anticipated growth. . . .
The success of Great Plains Software sparked other start-ups in fields ranging from biotechnology to wireless networking to radio frequency identification systems. Today, extrapolating from recent National Science Foundation data, North Dakota has one of the highest rates of high-tech startups in the nation, with the Fargo area as the undisputed epicenter. The area is also luring businesses from the coasts.
A big part of this shift has to do with lifestyle. What I decided in 1959, when I left Manhattan Beach, California — what was to become the consummate epicenter of Southern California's real estate boom — shaking the sand off my feet, is now becoming widespread. I wanted out of that lifestyle.
So even in the new, hipper Fargo, the real driver of success remains a set of values — self-reliance, community spirit, a dedication to family and faith — that have long been at the center of the Heartland ethos. After all, along with its finer dining and hip bars, Fargo has a microscopic crime rate compared to any major coastal city and little in the way of an underclass. As in Aurora, local charities thrive and community involvement is the norm.
These characteristics are the main draw, particularly to relocating thirty-somethings, notes Mike Chambers, founder of the fast-growing biotech firm Aldevron. It's an experience common to many companies in this buckle of the Brain Belt. "Wherever you go you find people who went out and came back," says Howard Dahl, CEO of Fargo-based Amity Technologies, a fast-growing agricultural machinery firm, and former head of the local Arts Council. "We constantly get resumes from people at Boeing in Seattle or somewhere else. They don't come for the mountains or the sunshine or the culture — they come back because of the kind of people who are here."
This shift has religious overtones and implications. Americans are leaving the "do your own thing" morally, in exchange for "do more of your own thing" entrepreneurially.
Dahl, a former Lutheran seminarian, says religion also plays a major role, but not in the loud, assertive tones one might find in Houston or Dallas. "Religion and family play a huge role in everything, but it's quiet. It's people's sense of ethics," he suggests. "It's that you care about your community and can count on your neighbors."
What Robert Nisbet identified as the quest for community back in 1953 is still in process.
Such values, Aurora's Gary Allen believes, are the real secret behind the nascent Heartland resurgence. In a town of barely 4,500, there are more than thirty non-profit foundations, with assets in excess of $45 million. It is all part, notes Gary Warren, of a community spirit reflected in the city's extensive recreation facilities, its well-maintained central square, library, senior center and museum. "Community building is a way of life here," Warren offers. "You give to your community the way you give to your church on Sunday. It's the essence of what it is to live here, and it's why people decide they want to come here."
For young families, the heartland once again offers opportunity. The weather will not get any better, but technology can overcome the worst aspects of weather — air conditioning in the heartland South and heating oil in the heartland North. I have preferred the South to the North. Fuel costs may reinforce this preference over the next few decades.
For retirees, the heartland is better. People move to Asheville, North Carolina, not to Los Angeles, to retire.
For start-up entrepreneurs, the heartland is better. Locate a university with a good engineering department and move there. College Station, Texas, gets my Good Entrepreneurship seal of approval. So does Auburn, Alabama.
For young families that don't want to spend their lives as mortgage serfs, the heartland is better.
The South will rise again. It just won't be the South. The South is gone with the wind. If you think I'm wrong, let me know the next time you see an all-white backfield at the University of Alabama.
February 20, 2007
Copyright © 2007 LewRockwell.com