Real Estate Free Fall?


"Things do seem to be getting worse very quickly. Free-fall is a strong word, but I think it’s the right one to use here," says Paul Ashworth, chief U.S. economist at Capital Economics.

But most Americans look into the future, see a weakening property market, and fear not. They have been told that soft housing prices pose no problems for the rest of the economy. They have no reason to doubt that it is true; no reason to squint and try to see further. They dread neither slump nor boom…neither war nor peace. They believe everything will be managed by the authorities so as to do no great damage to the homeland.

But you typically don’t lose money (or make it) when things happen as expected. No one plans on losing his life savings. It comes as a surprise — along with sudden death, financial crashes, and other crises.

Where will the surprise come from this time?

We wonder, because things that are expected present few opportunities and few catastrophes. When an old man dies, people gather at his grave almost with relief. Finally, it is over. His affairs are usually sorted out long before he reaches room temperature. So, the book can be closed and put down. No more chapters, footnotes, or postscripts. Time to move on.

But when a young man dies, it is as if the printer had made a mistake. The story is unfinished. We turn the page expecting to find out what happens, and there is nothing there.

The young man typically dies suddenly and unexpectedly, leaving crops in the field and his widow and children in the house. While the widow grieves, grasping neighbors move their fences, taking what was once his…and banks wonder if his mortgage will be repaid.

“I can’t tell you how hard it was,” explained a neighbor, widowed before she was 40, with five children, one of whom was severely retarded.

“Suddenly, everything changed. My husband had borrowed money to modernize the farm. But I really didn’t know how to pay it back. And then, farm prices were falling. And our farm hands all demanded more money. And nobody would give me any time or credit because they all thought I would fail and have to sell the place. It seemed like everyone was angling for something…and I had my children to look after. Those were the most difficult years of my life.”

If there are going to be difficult years in America, however, Americans are not worrying. They recall the last recession in 2001, almost fondly. Even before they had forgone a single Krispy Kreme donut…or darned a single sock…the recession was over. And on its heels came the biggest boom in housing prices the world had ever seen.

Recession? The last one was no trouble; why should they worry about the next?

The expected slump poses no danger to them. But what if the slump is not what Americans expect? What if the softening of housing prices is not so benign? What if the roof really does cave in?

Ah…that would come as a shock.

The Guardian took up the idea this week, quoting Paul Ashworth:

“House prices have been rising at unprecedented double-digit rates in recent years, giving homeowners massive windfalls and supporting a wave of investment in new construction. However, the number of unsold new homes is now at a 10-year high.”

Ashworth reckons that 30 percent of all the jobs created since the end of the last recession in 2001 — 1.4 million — have been in sectors related to the housing market boom, from construction to DIY stores. As the boom runs out of steam, he calculates that 73,000 jobs a month will be lost.

And, also in the Guardian, Stephen Roach warns, “for a wealth-dependent U.S. economy, the bursting of another major asset bubble is likely to be a very big deal.”

He notes, “With U.S. fiscal and trade imbalances now larger than five years ago, the fallout for the rest of the world could be more devastating than the aftermath of the dotcom boom.”

Of course, we have no more idea than anyone else. But at least we know what to look for — the unanticipated. What analysts broadly anticipate is a “soft landing” in housing…and no landing at all in stocks. What is unanticipated is a hard crash. Will it come? We don’t know. But at least we haven’t failed to anticipate it.

u2022 Yesterday, it rained all day. It was dismal…dreary…almost depressing. We had a fire in the dining room fireplace, and in our library, an octagonal building out in the yard, we had to turn on the gas heat.

Maria has gone back to school in London. Jules has left for school in Boston. Our last summer guests left this morning.

These are the last few days of summer…and there is an air of sadness about them…the kind of sweet tristesse that you get at the end of a long vacation.

Of course, this was no real vacation for us; we worked every day. But it was on our summer schedule and in our summerhouse…with our summer friends around…and the family coming and going. And now, it is time to close up the house.

Elizabeth left for Paris this morning to try to put our new apartment in order and this weekend, we will close the shutters…bolt the doors…put away the tools…lock up the library and the wine cellar…and prepare for another long year of work.

“I love it out here,” she said last night. “Especially this year, I really felt it — why I like this place so much. There are so many people around who care about the same things I do. They care about gardens, and old houses, and history, and manners. I feel more at home here in many ways than I ever did in Maryland.”

This summer, there seemed to be an especially active social life in this area. We attended two weddings, several dinners, and a couple of parties. None of them were particularly elegant, but all were tastefully done…and attended by interesting, cultivated people.

“Oh, my…I think this is our first serious social faux pas,” Elizabeth remarked as we walked to a party on Saturday night, only half joking.

We were approaching an ancient house, by way of a causeway between two large ponds. The house was of stone, substantial, and remarkably simple…with unpainted wooden windows that looked hundreds of years old. But as we were walking along we passed other guests, all wearing masks. And then, a sign reminded us we were supposed to have “come masked!”

“Uh oh…”

It was only then we realized that the invitation had not proposed a “masque,” in the Shakespearian sense of a private revelry…but a masked party…like a masked ball. And here we were, arriving unmasked….our faces naked. We were exposed as rude, foreign oafs — they might even take us for Americans!

But, the party evolved nicely…the masks came off after a while, revealing several friendly faces.

“Yes,” Elizabeth continuing her line of thought, “I like this area…and these people. They are as moss-backed as I am.

“But one man I met was even more moss-backed. He was a monarchist. You know, when people tell me that they are monarchists, I never quite believe them. They sound as if they are pulling my leg…. just being provocative…not serious…like you are when you say you favor monarchy.”

“But I am serious,” we replied.

“Well, maybe…but this man is actively working for the restoration of the Bourbons…even though he admitted that there was no chance that France would support a king again.”

u2022 An item in the news caught our eye the other day. Senator Lieberman compared the war in Iraq to the Spanish Civil War; it is a harbinger of worse to come, he wrote.

Coincidentally, we too have been reading about the Spanish Civil War in a history by Anthony Beevor. What interested us is that both sides — from before the war began…up until the day before yesterday — shared a common assumption. They both argued that they had the support of the masses. Votes were analyzed, polls taken, speeches deconstructed, both sides trying to prove that it had the right to rule — because it enjoyed the most popular support.

And each side committed sordid, barbarous acts: murder, rape, pillage, theft — you name it — secure in the knowledge that it had 51% of the population behind it and thus had the right to govern.

And today, the idea is hardly ever contested. “Majority rule” replaced monarchial rule a long time ago. But we wonder what makes it better? What gives people the right to rule one over another…merely because at that particular moment, in those particular circumstances, there are more lumps on one side than the other?

No thank you, dear reader. We are not democrats. Instead, give us a good king. Put him on the throne and tell him to mind his business. And if he taxes too heavily, spends too much, or dares to drag the country into war or absurdity — off with his head!

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.