Why a 50’% housing drop is good for our country

[powayseller]

We should all root for housing to fall 50%, so we can use our nation’s capital for research, development, production, investment, education, instead of consumption of homes.

It’s a shame that this diversion of money to housing is reducing our nation’s productivity and innovation.

Instead of putting money into developing solar energy, better education, reforming social security and health care, newer drugs, non-polluting transportation, next century of electronics, we are spending it on consuming housing (benefitting the construction industry only) and buying goods from China (benefitting the manufacturer in another country).

Further, we are putting ever increasing amounts of our slowly falling real wages into consumer durables. At the present pace, we would be spending 60% of our income on housing.

Money spent on housing, while a boom to the construction industry, doesn’t help this country advance in any sector. Hell, we can’t even export the darn things!

[technovelist]

All good points. I’d just like to add that there is no net gain for the population when housing prices go up; the nominal increase in wealth of homeowners is exactly balanced by the increasing difficulty of non-homeowners to buy. This is nothing specific to housing, of course: with any boom in asset prices, the increasing cost to those who don’t have the assets balances the increasing nominal wealth of those who do.

Needless to say, this doesn’t mean there aren’t any economic effects of asset price changes; there are. But they aren’t the “gravy train” that many people seem to think; in fact, in the current situation the (former) house price increases have been very detrimental to the economy as a whole.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

I fail to see how taking 10 trillion dollars out of an economy that is already fragile is going to solve any problems. Where will you get the 10 trillion replacement dollars, and how will you employ the millions that will lose their jobs?

[rankandfile]

I think the main point is that we could be allocating our personal resources in places other than housing.  That extra 20% of our monthly income could be invested more wisely in sectors other than housing (construction, financials, realtor's BMW 740i, etc.).

I'd be very interested in seeing some numbers showing what percentage of people's monthly earnings actually went to illegal immigrants in the construction industry.  It is well known that many in the construction industry here in SoCal are here illegally, or being paid under the table, or both.  Could it be that the additional monthly expenditures for housing have actually hurt our economy because many of those dollars don't go back to the government in the form of taxes, or don't go into paying health care costs?  Would it add even more strain to many people who have to pay more for these services?

[powayseller]

The $10 trillion is not lost, as it has been paid already to the former owners. What has happened now, as in the top of ths stock market in early 2000, is the last people into the ponzi scheme, paid off the lower tier. That’s what a ponzi scheme is.

With every home bought, there is a transfer of wealth, not a dissipation. So for every guy losing $200K on his foreclosure, is a Chris Johnston or a Schahrzad Berkland who earned $200K that is sitting in the bank. There is no money to replace; it already exists. A ponzi scheme doesn’t grow or lose money; it merely transfers it from the last people in, to the last people out.

Chris, if you really feel bad for these people, why don’t you go out and buy a house now, to reduce the unemployment of the construction worker? Better yet, let’s tell him what’s about to happen, so he can go back to school as an engineer. We need fewer construction workers, more engineers.

Also, if you feel bad, return the money you made off your house. That is part of the $10 trillion to be lost. You and I and the others who cashed out, have that money. To whom should we return it?

If the ponzi scheme continued, the next generation would pay 60% of income on housing, leaving nothing for new cars or the other industries that need support. How can car manufacturers have a chance if people are too broke to buy their cars? If housing is only 28% of income, people have enough money to invest and buy other durables and non-durables, creating a more diverse economy.

With the idea that housing prices should stay high, we are crowding out other products, as people just won’t have the money to buy them.

This housing bubble, like the tech stock bubble, is a ponzi scheme. Why would you want to preserve the ponzi scheme?

The millions who lose their jobs in this ponzi scheme will just transfer to more relevant fields in science, medicine, engineering. Some realtors on this forum are engineers already; they can go back to engineering, or selling engineering or biotech products instead of houses.

Building an oversupply of homes, making risky loans, and overseeing those transactions by realtors, inspectors, appraisers, title officers, escrow people (sorry, realtors, you are included here too), will find productive work in research, development, and sales of products which will bring the United States of America back to a global leadership position.

This great country will once again use its creativity, brains, its workers, its money to create, innovate, and build the products and services that increase productivity and quality of life, and increase return on capital.

I mean, what kind of return on capital does our country get for building homes that are 3x their true value, because of a bubble? Instead, let’s use that money to find alternative energy sources, since the end of cheap oil has arrived, and soon enough, the end of oil altogether will be here. Let’s make new biotech drugs to sell all over the world. Let’s increase Africa’s productivity as a farming nation, so they have enough money to buy the drugs we will produce. Let’s make the next generation of computers, pollution-reducing equipment, even better figher planes for your military buffs (although I could do without more military spending). But you get the idea: let’s be productive, to build our future, and start exporting again in a meaningful way.

Asset bubbles are the worst loss of capital and productivity that I can think of. Nothing is created. It’s a total ponzi scheme.

The money and workers that created this ponzi scheme need to be redeployed in a meaningful productive manner.

Schahrzad Berkland

[Anonymous]

I agree 100% that the correction is a good thing. Although it may cause temporary pain, it is a necessary pain to bring back order and sense to the economy.

Also, as was already mentioned most of the job creation from the real estate boom (aka ponzi scheme) has been to real estate agents, mortage brokers and illegal immigrants. Real estate agents don’t add any value to our culture, they are simply used car salesmen. As we know, illegal immigrants send much of their money out of country and may or may not pay taxes. How is our country better off if we are creating jobs for illegals immigrants and used car salesmen?

[anxvariety]

Where will you get the 10 trillion replacement dollars, and how will you employ the millions that will lose their jobs?

I know I know!! The Fed stops reporting M3 and turns the printers on full blast!!

[JES]

It would be a good time to start a company that provides retraining options for realtors! Seriously, to echo what powayseller said, the country will be better off if some of these folks go into engineering and nursing. Lucrative fields with huge shortages of manpower. If I had the slightest bit of interest myself I would become an RN.

A huge correction will result in other positives. Less risky seconds to eliminate PMI and fund consumption, and more job creation in other fields that will benefit from the increased consumption not going towards housing. The social impact of opening up more housing to lower income families is also a plus, not to mention the affect this will have on better positioning families to save more for retirement and education if they wish.

[(former)FormerSanDiegan]

Actually $10 trillion is lost.

The $10 trillion is not lost, as it has been paid already to the former owners.

I beg to differ.

At the time the home is sold, it is simply a transfer of wealth, not a dissipation (agree with you here). However, when the house value drops, it is actually a real economic loss. Although the seller still has their 200K in the bank, the buyer has 200K fewer assets. Lenders on the loans have fewer assets to back their paper. That’s why a housing decline will bring on real economic consequences.

Unlike a ponzi scheme, when the price declines by another 200K, the value does not go into anyone elses pocket. It is a true loss.

If the $10 trillion is not lost, why would you and others worry about the ensuing housing-led recession ?

[powayseller]

Dean Baker: “It was an enormous mistake for the United States to allow a housing bubble to grow to such dangerous proportions. It is unfortunate that the Federal Reserve Board and others in policy making positions ignored warnings when this crisis still could have been averted. ”

Blame the Fed and your elected officials if you don’t like foreclosures or unemployment.

Honestly, why the hell did they have to create a ponzi scheme that was sure to crash?

As an analogy, let’s say a smoker (cigarette addict) is going through withdrawals in rehab. (This is like the tech crash).

So instead of letting him go through the pain of withdrawal, you give him a case of whiskey so he forgets about smoking and feels better for the next week, but then he ends up an alcoholic, which is even worse. (This is the housing bubble.)

Now what are you gonna do with that alcoholic? Give him heroin to shake off the alcohol? Give him back the cigarettes? What can the Fed really do?

In the eyes of the Fed, it was worth getting drunk because the hangover from the valium withdrawal was so bad. A bunch of wimps!

Where’s the leadership in this country?

JES – I should have added your comments to my post. Young people need a chance to buy a house too. With 5 years out of college, maybe you earn $50K/year, and you can only qualify, w/ a 30 year fixed, for a $150K – $175K home. We need many $150K homes in San Diego for the young first time buyers. Starter homes need to come back to that level. With less money spent on housing, families have more disposable income for education, retirement savings. As it is now, we are lining the pockets of builders, making the rich get richer. Didn’t Toll Bros. CEO get $31 mil last year? That $31 mil could have been used to bolster every buyer’s retirement account by thousands of dollars.

[Bugs]

The only way the current price structure can continue on without outright correction is if the dollars comprising those prices decline in value. If that’s the case, the cost of all services other than RE will increase while RE prices remain stable. Not only will our products be less competitive of a global scale, but the value of the assets purchased prior to the price distortion will decline at the same rate. We will, in effect, be forcing the people who had equity (in value) prior to the distortion to redistribute part of it to subsidize the people who would otherwise suffer a loss.

Correction of the wage/price distortion via inflation is not the “cure” that any non-FB should hope for. Let the people who contributed to the problem pay for it and please leave the rest of us out of it.

[(former)FormerSanDiegan]

Bugs –

Let the people who contributed to the problem pay for it and please leave the rest of us out of it.

Unfortunately, a small fraction of the population caused the problem.

However, homeownership rate in the US is ~70%. In San Diego it’s somewhere around ~60%. The correction will affect a majority, whether it’s through inflation, asset value correction or a combination of both.

[JES]

I personally know of a regional director of a building company in San Diego who received a $500,000 bonous two years ago. He also owns a few beach homes and land all around town.

[Anonymous]

The “10 trillion dollars” never existed anyway. They were merely the phantom valuation of a non-monetary asset. All of the same assets will remain, it’s just that their value will be less. A ponzi scheme creates no actual value (unlike manufacturing, true services, etc.), it merely shifts money from A to B…that’s the point.

[PerryChase]

Wealth that was created exists. Taking it back is the painful part.

[Author]

Posts