Like Crazy

“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?”


“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.

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