THE GOOD LIFE WAS BASED UPON PERPETUAL MOTION
"LEVERAGING" JOBS, CARS, HOUSES, CREDIT ENDS ABRUPTLY
Now That The Music Has Stopped, Who's Left Without A Chair?
The "Greatest Generation," who survived the first Great Republican Depression and then fought against the radical right-wing Fascists in WWII, worked hard and played by the rules, bought a house and a car, built the freeways and developed the suburbs, and died in the first house they bought, the one where they raised their kids. The kids, AKA "Boomers," were a little more go-go, but they still played by the same rules. Job changes, corporate relocations, divorce and a desire for life in a warmer or more bucolic place led them to buy two or three homes over their lifetime.
They scraped for the small starter home, upgraded within ten years to a larger, family-sized home, and maybe then a trophy house or vacation home if they were lucky later on in life. As the kids moved out, within another ten or fifteen years, they bought a smaller place, an easy-to-maintain condo, or a retirement cottage. And that was it. They steadily climbed the real estate ladder, rarely speculating in property short-term, growing the economy slowly and cashing in at retirement time. For both of these generations, the 30-year+ equity in their homes was literally their next egg, the bundle they could cash in at retirement, and rarely if ever before.
Their kids and grandkids, Gen-X+Y, observed all this and decided that they wanted the exxxtreme version of it, with the payoff right now, again and again. Some of them owned their first home while still in college, or shortly thereafter, thanks to Mom & Dad. When things went boom, they flipped that place and leveraged the proceeds into a bigger house or a nicer location. But they didn't stop there. More and more people started playing real estate roulette, flipping houses every few years, or refinancing them and setting up equity lines of credit to cash the old homestead in before its' time. It was all good as long as the economic tide kept rising. Except that, due to the speculation-driven shortened periods of holding property, prices began to lose touch with actual values, and people's ability to pay. The sky could not REALLY be the limit.
The limit was the end of the general expansion, when we reached peak production and consumption started to decline. All that speculative air that got pumped into the housing balloon started leaking out. A homeowner who'd risked everything on permanent rapid inflation and used up more equity than he or she was likely to see anytime soon suddenly found him or herself under water. Now they could either sit and wait and wait and wait it out, or sell for a loss and make up the difference out of savings or other investments, leaving them broke. In a pinch, they could just walk away from it all, leaving themselves with no assets, no credit and no home. The merry-go-round had come to a halt, and there were no more brass rings. Or whatever the video game equivalent is.
One complication among the many that these trends have created is the almost universal practice of leveraging jobs AND homes. Very few companies expect or desire their employees to stay for life, or even ten years. Many companies do not last that long, any more. An ambitious and prudent person has no choice today but to change jobs multiple times in his or her lifetime, a course that would have seemed scandalous to their grandparents, and shaky to their parents. But when the only way to advance is by making a lateral move to another company, and when the constant upward pressure for lifestyle improvements requires constant career advancement, you simply have to follow the money. That may mean moving from one place to another, even back and forth across the country more than once. But what happens when you suddenly cannot sell your overpriced, over-leveraged house? What happens, then, to your career mobility? And how does that effect production and consumption?
The current economic slump will last as long as it takes for home prices to match what is owed on them, and what buyers can afford. That may take one year, or five, or ten, or twenty years. Meanwhile, a lot of people are going to be stuck in houses they can no longer use as cash machines. Consumption of other goods and services will slow down until real estate prices go up and/ or mortgage debt goes down. As long as consumption is down, production will stay down too. And moving around to find new opportunities to make more money will be difficult if homes cannot be sold for enough to pay off their mortgages. So where is the money going to come from to fuel a rise in consumption and production, or in real estate prices?
The credit markets are effectively blocking any sort of growth today. A whole generation has grown up on credit, never worrying about how much they were spending or when they would be able to pay it off. Their consumption patterns are based on their job mobility and on the availability of credit. If people can't get mortgages or make other credit purchases, homes cannot be sold and markets cannot get moving again. If there is no market, there is no mobility and no way to increase income. If there is no increase in income, markets cannot get moving. It's a logjam that may only be broken by government intervention.
The government recently had two opportunities to break this logjam, and get the economy moving again. They passed both of them up: The cramdown provision would have allowed for the renegotiation of mortgages as a last resort. Another measure would have capped credit card interest rates at half their current maximum, and protected consumers against gouging. The financial industries' "campaign contribution" bribes to Congress and the White House killed both measures. Unless these attempts at fairness, and easier more affordable credit are revived we can expect the logjam to last a very long time.
Cities that host entire industries, like Hartford or Houston, might be exempt from mobility blockage, if those industries do well. If you can get a better job right across town, you might not need to sell your home. Big cities with multiple industries and millions of jobs might also suffer less from the housing crunch's effects on job mobility and income expansion. The availability of affordable rental property and public transportation might help also. But all those smaller cities, little towns, suburbs and exurbs that rely on a few firms for most of their jobs, with no place else to go for a better job, will be hurt severely by any further impedance of job mobility due to the real estate market freeze. Once again, the economies and efficiencies of the cities make the hinterlands look like economically untenable, unwise experiments.
Unless our government slaps down the greedy bankers and brokers who knowingly and irresponsibly facilitated all this, we are headed for a long slow decline at the worst possible time. The WWII and Post-War generations are past their years of increasing productivity. Soon, the youngest Baby Boomers and the oldest Gen-Xers will be slowing down, too. This leaves the smaller generations coming up in a less-productive economy with all the burdens that their parents and grandparents had, plus the extra burden of caring for a huge group of old people who will live well into their 90's, requiring more care every year. The time to deal with this began over twenty years ago. But years of short-sighted and profligate "conservative" policies and practices prevented any reckoning of the future, and in fact burned up all the income & assets that could have saved us.
If the Obama government does not act now, it will be too late to do anything but watch this country sink into the mud. It's time to reverse the short-sighted short-term thinking, and start acting like we all have a future. In the short run, Congress must immediately free up credit and give debtors a break. In the long run, this whole wasteful system has to be rationalized. Mass speculation is no basis for an economy. Nomadism is no basis for a society. Individuals and families need stability to thrive. A system that is based upon providing for the needs of the people instead of the greed of the corporations is what we deserve and demand. The perpetual motion machine cannot sustain itself.
(MORE posted at blog me no blogs by cosanostradamus.)