Lifting IQs

Nothing lifts I.Q.s more than a property boom.

America’s real estate bubble has created a whole nation of geniuses…people who think they are smart because their houses have gone up in price. And the smartest of them weren’t content to merely watch prices rise; they took advantage of them by leveraging themselves into more and more expensive properties.

But now stocks are beginning to wobble. The Dow dropped 214 points yesterday and leading it down were the building stocks. What they are telling us is that the great bubble is over.

“I have a neighbor who asked me for financial advice,” said a speaker at yesterday’s investment conference. “But I don’t want to give him advice…so when he asks me if property is still going up, I just smile and say ‘maybe.’

“I’ve watched him over the last few years. He bought one condo before it was built. He flipped it and bought another one. And then, he bought a whole bunch of them. To him, the secret of getting rich seemed so obvious. All you do is buy beachfront condo at pre-construction prices…and then flip them to someone else. And when he asked me about it, I’d just say, ‘Well, I don’t know how much longer this boom is going to continue.’ He must have wondered what was wrong with me. He was making a fortune. I just didn’t get it.

“But the last time I saw him, he told me that the condos he bought aren’t selling like he expected. I wish I could tell him ‘I told you so,’ but I never told him anything.”

There must be millions of real estate speculators, concentrated in the hot markets on both coasts, in similar situations. They’ve stretched to buy. Now they’re stretched to keep up with maintenance, taxes, condo fees, and interest payments. Their neighbors bite their tongues. “I told you so,” they itch to say.

Don’t worry, say the experts. The boom may have peaked out, but there should be a soft landing.

“I’m not so sure,” continued our speaker. “People say the property market can’t collapse, because houses are tangible and people have to live in them. They compare housing to stocks, for example. The stocks can fall 90%…or even disappear. That doesn’t happen with housing.

“No, it doesn’t happen the same way, but a much smaller decline in housing prices can have a much bigger impact on people like my neighbor. Let’s say prices go down just 10%. That’s not much. We could expect at least a decline of that much. But a lot of people don’t have 10% equity in their houses. They’ve bought with zero-down mortgages — or maybe 5% — never expecting to have to pay off those mortgages.

“Instead, they were counting on price increases, either to refinance or to sell. If they are forced to pay a mortgage greater than the value of the house, they are going to be in big trouble. And a lot of them aren’t going to make it.”

What can you do to protect yourself? If you have a house you don’t intend to hold for a long time, this may be your last chance to sell at near-peak prices. Otherwise, all you can do is to put your money where a U.S. housing collapse won’t hurt it.

Yesterday’s speakers had a number of ideas: Japanese real estate, Icelandic bonds, oil and gas companies, rare coins and other collectibles…and gold!

“Gold is not really going up because it is becoming more valuable,” said John Doody, editor of Gold Stock Analyst. “It’s going up because the dollar is becoming less valuable. And that’s a trend that is not likely to stop anytime soon.”

John showed us a chart.

“Look at this. Gold has gotten ahead of itself. It’s way out of its channel. It looks as though you can expect a correct back to $650 or so. That would be a good thing…it would allow the gains to consolidate and set the stage for another big run-up. How high will it go? I don’t know. It could go to $1,000 without any trouble. But if it goes to $3,000, a lot of other things are going to be going wrong.”

u2022 “Inflation’s rising toll on consumers,” reads a headline from the Christian Science Monitor.

High energy prices and rising interest rates are, of course, taking a toll on consumers. And now, “everyday items” have risen “more than expected.” The article reports:

  • The pace of home-mortgage applications is down 15 percent, compared with this week a year ago, as “for sale” signs stay up longer in a slowing home market.
  • Half of Americans have changed their vacation plans to stay closer to home, according to an Associated Press/Ipsos poll out this month.
  • Prices beyond the gas pump are also edging up. The “core” consumer price index (CPI), which excludes volatile food and energy costs, surprised analysts by jumping 0.3 percent last month, according to a government report Wednesday.

The economic climate has become increasingly challenging to consumers: ” ‘an economic a gray zone’ where the pace of economic growth may be slowing even as the threat of inflation remains in the foreground.”

u2022 One helpful reader posted this review of Empire of Debt at

“Bonner and Wiggin are a-holes. Not because everything they say is wrong but because they seem to take glee in trashing America, its government, and its people. No person, place or thing is perfect, but these guys would have you believe their observations and pronouncements are, while us poor masses don’t know our A’s from a hole in the ground.

“Before anyone buys this book do a little research on Comrades Bonner and Wiggin; their various business’s, web sites, newsletters, etc. Put a few facts together and see how much you trust these two yahoos then. After that anyone who buys this book and believes all the garbage in it, and tries to preach it, is probably an a-hole also.

“On the other hand if you have always wanted to be an a-hole then this is a good place to start.”

If nothing else, dear reader, we’re providing a valuable public service.

u2022 Earlier this week, we were staying at the Inn at Perry Cabin in St. Michael’s, on Maryland’s Eastern Shore. It is a small world. The Inn is a delightful small hotel owned by the Sea Containers Corporation, which owns a chain of luxury hotels around the world, including the Windsor Court in New Orleans and the Cipriani in Venice.

Its headquarters are in the same building as our office in London. Alas, nothing fails like success. A recent article in the Financial Times told us that the parent business may “no longer be a going concern.” Auditors were examining the books to find out if the company is bankrupt. Go figure.

u2022 We breathed deeply and tried to take it in. We stared. We wondered.

For half a century, we lived in America, but now, on this trip through a corner of it, everything seemed familiar…and strangely foreign, too.

Nothing is nothing, until you turn it into something. Even the sights and sounds of Middle America are nothing more than information without a theory. We have one theory: the U.S. has been in a credit bubble for the last five years. We saw the results of it in some places: hundreds and thousands of new houses outside Annapolis, Baltimore, Pittsburgh, Reading.

On Kent Island, there are rows of new condominiums. A country is built, transformed, shaped during a credit expansion. It is probably a matter of luck when it happens to coincide with decent architectural fashions. What goes up during a credit expansion lasts far beyond the credit cycle; future generations have to live with it. Americans were lucky so much building took place before the ’29 crash. Architects still had some taste and style. They were lucky, too, that their pre-’29 cities were not destroyed in the war. Post-war architecture did more damage than bombs. Paris was spared, but Caen was not so lucky. Blown up by the allies, Caen was rebuilt by architects under the influence of Le Corbusier; it is a disaster.

In America, the housing that went up after the war was cheap and ugly. Later, in the ’70s and ’80s, it was not as cheap, but quite as low and repulsive. Now, it is being replaced by the new housing of the 21st century, which, though not great architecture, is at least an improvement on what went before.

But out in the hills of West Virginia and western Pennsylvania, it is as if the credit bubble never existed. The houses are about as dreadful as they have been for the last 50 years. Typically, people let a respectable ’20s-era house fall to ruins and pull a mobile home up in front of it. There they live in comfort and degradation; charm and dignity are as absent from their lodgings as from a dentist’s waiting lounge.

We sucked hard at the air…to try to understand. America has never been a place with much culture, but the standards of everyday life seemed to have slipped even lower than we remembered them. In vast sections of the country, people don’t seem to care what they look like. The motels and restaurants are shabby. The food is often tasteless. These are not hard, ambitious, critical people; they are nice, doughy, contented folks.

Mush is the stuff of Middle America. People are soft and mushy. They dress in shorts, T-shirts, and running shoes — clothes that yield, rather than insist. The starch has gone out of their clothes, their finances, and even their conversation. They address each other with greetings as soft and sweet as Krispy Kreme.

Their heads are full of mush, too. We listened to a talk radio show as we drove down the Pennsylvania Turnpike. The issue was immigration from Mexico.

Milton Friedman clarified the whole business years ago, the show’s host recalled. “You can’t have open borders and a welfare state at the same time,” he remarked. “If you do, you’ll be overrun with immigrants and your welfare system will go broke.” But this insight was lost on the mush brains. Anyone who really believes in democracy should have to listen to talk radio; a few minutes of listening to callers bellyache would cure them. These were people who shouldn’t have been allowed anywhere near a telephone, let alone a voting booth.

Callers ranted about “protecting jobs” or “protecting our way of life.” We looked around. In some of the towns we went through, we wondered why they would want to.

Pressure is mounting to seal the borders. The Chinese sell things too cheap. Mexicans work too cheap. Besides, the Mexicans don’t speak English. In West Virginia, we saw whole towns that were almost abandoned — Thomas, West Virginia, for example.

When the mines shut down, there was not much left. The shops are empty. Windows are boarded up. Old houses are for sale for as little as $20,000. It could use some Mexicans.

“A person could live very well here,” said Elizabeth. “Property is cheap…and some of it is very pretty.”

We were looking out at a valley with green pastures, a swift-running river, old forests, and a white clapboard house. Yes, you could live well — as long as you didn’t care about restaurants, museums, shops, and the other amusements and refinements of civilized life.

But then, we were surprised. We went into the only restaurant still open in Thomas. The place was practically deserted, but there, in the corner, was a bluegrass band practicing for Saturday night entertainment. In a minute, our toes were tapping. The fiddlers sawed away, and the sounds of Appalachian mountain music filled the room.

We were enchanted.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.