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Several items
on a general theme about chasing and losing the American dream, which is much
more than real estate, but in the Bush voodoo economy, home ownership has been
the last bastion of economic security and sense of stability for the working
classes. KwC A
Sharecropper's Society? Washington Post Editorial, Sunday, August
7, 2005; B06 "THE ECONOMY of
ours is strong," President Bush declared on Wednesday, and to some extent
his boast was right. U.S. growth is outpacing that of rivals in the Group of
Seven club of rich nations, and productivity is improving faster. But this
progress is accompanied by a troubling phenomenon. Every year Americans sell or
mortgage a slice of their productive assets to foreigners, with the result that
income from those assets must flow abroad in the future. Warren E. Buffett, a
legendary investor and a director of The Washington Post Co., has written that
the United States is on its way to becoming a "sharecropper's
society." Some optimists say
that this doesn't matter. They argue that purchases of U.S. equities and bonds
are a vote of confidence in our economy, glossing over the fact that we're
signing up to pay dividends and interest to foreigners. They point out that
Americans are accumulating assets in other countries, not mentioning that those
purchases aren't enough to offset sales of our own assets to foreigners. Rather
more persuasively, the optimists say that if we sell bonds to foreigners and
use the proceeds to build laboratories or deploy broadband, we may end up with
more productive assets than we had in the first place. But are we really
selling assets to finance clever new investments? Or are we mortgaging our
future to pay for today's comforts? There have been times
when foreign money did finance productive investment. In the late 1990s the
U.S. government was saving rather than borrowing, so foreign capital flowing
into the country found its way to firms that invested it -- not always wisely
but on the whole quite well. But since the tech bust, corporate America has reversed
its usual pattern of taking in people's savings and investing them; companies
have become net savers, returning cash to people via dividends and share
buybacks. So foreign capital has been flowing instead to government. This pattern, in which foreigners buy U.S.
bonds and equities and the money gets spent on Medicare bills, is unlikely to
expand the nation's stock of productive assets. Moreover, it has coincided with
a period of extremely large foreign purchases. The U.S. current account deficit
has grown to an astonishing 6.5 percent of gross domestic product, twice the size that Federal Reserve officials used to
call unsustainable. This means that the nation is consuming around $700 billion
more than it earns each year and paying for the difference by mortgaging or
selling assets. Foreigners' "net ownership" of the United States --
the assets they own here minus the assets that Americans own abroad -- already
comes to $2.5 trillion. The International Monetary Fund projects that it could
more than double by 2010. This isn't a crisis,
at least not yet. A modest decline in the greenback would boost the dollar
value of America's overseas portfolio enough to wipe out foreigners' "net
ownership" of the United States. Moreover, Americans are clever investors
-- they earn more from their foreign assets than foreigners earn from their
larger stock of American assets -- so Mr. Buffett is himself part of the
solution to the problem that he identifies. But the vision of the United States
as a sharecropper's society remains distressingly plausible. The country is living beyond its means,
spending more than it earns and relying on foreigners to supply the difference.
If a future generation of Americans is called upon to tighten its belt to repay
overseas creditors, today's ugly economic nationalism may seem mild in
retrospect. http://www.washingtonpost.com/wp-dyn/content/article/2005/08/06/AR2005080600862.html?nav=hcmodule US Treasury says its bringing
back the 30 Year Bond in 2006, a move which would help finance the national debt
http://www.nytimes.com/aponline/business/AP-30-Year-Bond.htm All Eyes on the San Diego
real estate market. “Once Southern California's hottest real estate market, San
Diego is feeling a real estate slowdown. It's a trend also starting to be seen
in other regions, such as Las Vegas, Denver, Boston and Washington, D.C. Marcel: The
Real Estate Bubble bursts the American Dream. “There's
a human cost to this real estate bubble. Children can't afford to buy homes in
the towns they grew up in; they leave the area and even close families get
split up. Downtowns become full of art galleries and homemade soap stores
instead of shoemakers, fish markets, greengrocers and soda fountains. Our
friends and neighbors are forced to leave. We no longer see familiar faces when
we walk downtown. It used to be the
American Dream:
buy a home on a 30-year mortgage, make friends, work hard, raise a family, be
part of the community, watch the children marry, help them set down nearby
roots, finally have a party and burn the mortgage, retire and putter in the
garden, die and be buried in the local cemetery. This was a great
dream, a great promise, and now it's gone. "We are losing our history, losing our children out of here, losing to
greed what makes Vermont special," Werner said. "The green
space is going, going, gone. It's a race to see who can sell what at an outrageous
price to some sucker from down south, and the suckers keep on coming. We're
turning Vermont into exactly what people are fleeing from in New York and
Boston." http://www.commondreams.org/views05/0804-24.htm That Hissing Sound by Paul Krugman, NYT, Monday,
August 08, 2005
This is the way the bubble ends: not with a pop, but with a
hiss. Housing prices move much
more slowly than stock prices. There are no Black Mondays, when prices fall 23
percent in a day. In fact, prices often keep rising for a while even after a
housing boom goes bust. So
the news that the U.S. housing bubble is over won't come in the form of
plunging prices; it will come in the form of falling sales and rising
inventory, as sellers try to get prices that buyers are no longer willing to
pay. And the process may already have started. Of course, some people still deny that there's a housing
bubble. Let me explain how we know that they're wrong. One piece of evidence is the sense of
frenzy about real estate, which irresistibly brings to mind the stock frenzy of
1999. Even some of the players are the same. The authors of the 1999 best
seller "Dow 36,000" are now among the most vocal proponents of the
view that there is no housing bubble. Then there are the numbers. Many bubble deniers point to
average prices for the country as a whole, which look worrisome but not totally
crazy. When it comes to housing, however, the United States is really two
countries, Flatland and the Zoned Zone. In Flatland, which occupies the middle of the country, it's
easy to build houses. When the demand for houses rises, Flatland metropolitan
areas, which don't really have traditional downtowns, just sprawl some more. As
a result, housing prices are basically determined by the cost of construction.
In Flatland, a housing bubble can't even get started. But in the Zoned Zone, which lies along the coasts, a
combination of high population density and land-use restrictions - hence
"zoned" - makes it hard to build new houses. So when people become
willing to spend more on houses, say because of a fall in mortgage rates, some
houses get built, but the prices of existing houses also go up. And if people
think that prices will continue to rise, they become willing to spend even
more, driving prices still higher, and so on. In other words, the Zoned Zone is
prone to housing bubbles. And Zoned Zone housing prices, which have risen much faster
than the national average, clearly point to a bubble. In the nation as a whole, housing prices rose about 50
percent between the first quarter of 2000 and the first quarter of 2005. But
that average blends results from Flatland metropolitan areas like Houston and
Atlanta, where prices rose 26 and 29 percent respectively, with results from
Zoned Zone areas like New York, Miami and San Diego, where prices rose 77, 96
and 118 percent. Nobody would pay San Diego prices without believing that
prices will continue to rise. Rents rose much more slowly than prices: the
Bureau of Labor Statistics index of "owners' equivalent rent" rose
only 27 percent from late 1999 to late 2004. Business Week reports that by 2004
the cost of renting a house in San Diego was only 40 percent of the cost of
owning a similar house - even taking into account low interest rates on
mortgages. So it makes sense to buy in San Diego only if you believe that
prices will keep rising rapidly, generating big capital gains. That's pretty
much the definition of a bubble. Bubbles end when people stop believing that big capital
gains are a sure thing. That's what happened in San Diego at the end of its
last housing bubble: after a rapid rise, house prices peaked in 1990. Soon
there was a glut of houses on the market, and prices began falling. By 1996,
they had declined about 25 percent after adjusting for inflation. And that's what's happening in San Diego right now, after a
rise in house prices that dwarfs the boom of the 1980's. The number of
single-family houses and condos on the market has doubled over the past year.
"Homes that a year or two ago sold virtually overnight - in many cases
triggering bidding wars - are on the market for weeks," reports The Los
Angeles Times. The same thing is happening in other formerly hot markets. Meanwhile,
the U.S. economy has become deeply dependent on the housing bubble. The
economic recovery since 2001 has been disappointing in many ways, but it
wouldn't have happened at all without soaring spending on residential
construction, plus a surge in consumer spending largely based on mortgage
refinancing. Did I mention that the personal savings rate has fallen to zero? Now we're starting to hear a hissing sound, as the air
begins to leak out of the bubble. And everyone - not just those who own Zoned
Zone real estate - should be worried. http://www.nytimes.com/2005/08/08/opinion/08krugman.html |
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