From Housing to Employment: We're in Big Trouble

I see a 60-80% decline in residential real estate from the 2005 highs in the worst areas. The recessionary climate will be exacerbated by inflation, where marginal homeowners with oppressive mortgage payments will be nudged over the edge of the foreclosure precipice by higher gasoline prices, accelerating food costs, and rising natural gas and heating oil prices. Higher coal prices will inflate utility bills for millions.

Rising unemployment due to the slowdown will force quite a few people to relocate and walk from their mortgages. It is quite possible that areas such as Cape Coral/Ft. Myers and Naples, Florida, Las Vegas and many areas of California, areas that have little industrial, agricultural or other stable bases to support the populations, could see a Great Depression like migration to areas of the country that do have job opportunities.

Homes once commanding $400,000 in 2005, could see values in the $100,000 range or less in real terms. Why? Because it is not unlikely that the median household income in these areas could drop to $25,000 from the current $50,000. Consider that many households will experience a job loss for least one wage earner. Other wage earners will likely see a reduction in earnings due to lowered commissions or less hours of work.

The historical ratio of household income to a house purchase price is about 4 to 1. This is a ratio that has proven to maintain a long-term stability in housing. Divergence from this norm, where ratios have climbed to over 10 to 1 in many areas, is the causation of the problem in the first place. 10 to 1 ratios cannot be sustained. The government can attempt to prop-up these mortgages, but the market will prevail, and ratios will return to a sane level. Millions of people will grow tired with the struggle to service a mortgage in an area that is dying, regardless of the government’s actions. Large numbers will choose to default.

Moreover, it is likely that prices will overshoot the base line. Could a house valued at $400,000 in 2005 have a market value of $60,000 in 2012? This is not only possible but quite likely. In fact, if a house is located in an area that has high vacancy rates, poor employment, and little chance of growth, if the house was built twice the size it ought to be, if it was built in an area that never had a previous economic base, if the house was built in an area that was created by a mal-investment folly, then that house is practically worthless to all but the indigent.

Much of the economy in these areas was built on the real estate boom and credit. Some areas, such as Las Vegas and Cape Coral, Florida, saw tens of thousands of houses built and then sold to people with no prospect of employment outside the housing market and its ancillaries. Consequently, many of these areas have no lasting economic reason to exist. They have no steel mills, no farms, no factories, no mines, no timber, no lumber mills, and no production outside of housing to speak of. What they do have are millions of non-productive people consuming production.

Tourism, the only economic base for some areas, will dwindle. In the boom times, tourism supported only a fraction of the population. There is no good reason to believe that tourism will save the day in bad times.

These areas were created, expanded, sustained and kept alive by millions of real estate agents, mortgage brokers, carpenters, plumbers, roofers, and landscapers, all those involved in the building, selling and the promoting of real estate. A great number of these people relocated to the boom areas and took up permanent residency and bought houses themselves. They weren’t immune to the boom’s propaganda. Most of them were caught up in the frenzy and believed the hype. These people will be out of work and stuck in a bad area with little chance of selling. Many will be forced to walk away and look for work elsewhere.

Boomtowns become ghost towns when they no longer make economic sense.

Whole industries built around home appointments and home improvement will suffer. Furniture manufactures and stores, mattress makers and retailers, garden centers, lumberyards, landscapers, roofers and the like will see dramatic slowdowns. Car dealers and manufactures will suffer due to the reluctance of lenders to create more consumer debt. Consumers will slowly begin to see debt as something to avoid rather than embrace. Debt was in an upward spiral for years, the downward spiral is just now beginning.

Just as debt was deployed as a defense against the angst of feeling envy while viewing one’s more successful neighbors, saving will become the defense against the angst of fear, the fear of the loss of comfort and safety. The second has far more economic power than the first.

If inflation becomes rampant, fear will prompt many to turn to gold and the stockpiling of necessities. Stockpiling will fuel inflation. If deflation becomes dominant, where the spiraling down of the fractional reserve mechanism partially extinguishes demand deposits, many will turn to mattress cash, gold and treasuries. Rather than stockpile, many will see the wisdom of buying the minimum on a “just in time” basis, fueling more deflation.

Just as small cars will seem more rational than large ones, the small and modest home will become a necessity, while the millions of gaudy, oversized houses will be a shameful reminder of the foolishness of the past. There will be little reason to view one of these behemoths as having more practical value than an easy to heat and cool small home.

Practicality will be the new mindset. In fact, the small and efficient home with a back yard big enough for a vegetable garden will, finally, make more sense. The rich will gravitate away from the ultra large mansions and downsize to more efficient and smaller homes in an effort to impress in reverse.

Ironically, many of the less fortunate, the poor, will live in the pseudo-mansions that were built in the boom. They will board-up rooms that aren’t needed. They will heat, cool and service the smallest area possible. Other possibilities are two or more families moving into the same house.

The mindless millions who financed and refinanced debt, debt that was used to buy non-productive gadgets, skateboards, monster televisions and granite counter tops, will be left dazed by the storm that is coming. Denial will be rampant in the short term.

Will the government be able to fix the problem? No. The government can write law that delays pain for some and places it on others in an effort to equalize misery, however, the government produces no goods, it has no production, and production is the solution. Production is the only solution.

When one borrows money from another, he is actually borrowing production. This is the underlying reality. Americans have borrowed an incredible amount of production from around the world, from our own retirement funds and savings, and therefore from our own future. We no longer produce enough to repay the debt in a timely fashion. Many of the factories are gone. No law can make this reality go away in the near future.

Another universal reality: Production is the foundation of human life. No production, no life. Food must be produced. Clothes must be produced. Fuel must be produced.

In the Great Depression of the 1930s, America’s economy stumbled, but simmering under the surface was the world’s premier economy with a productive spirit that surpassed all of the countries that have ever existed. The greatest workforce ever known stood by and waited for the financial problems to be ironed out. Once they were, these millions of highly skilled and productive people produced their way out of the depression with a vengeance. Ore was dug, steel was poured, machines were built, and the people worked their way to a great prosperity.

Now, America faces another depression. Sadly, most of today’s young Americans can download music or ride a skateboard, but they can’t hoe a garden or drive a farm tractor. Many have no idea how things are made or how food is grown. Millions borrowed billions of dollars and got college degrees that have no connection to production. An entire generation has been taught skills that involve nothing but shallow talk. We have fewer engineers, fewer machinists, fewer welders and heavy equipment operators. We know a lot about how to borrow and consume but little about how to produce.

We are in big trouble.

Comments

[Things ComeUndone]

Any idea when this will happen 6 months a year?

[jf_audit]

wow, scary

[Northvic]

I think the writer needs a refresher course in economics and to think about the indomitable human spirit for a moment. New industries and opportunities will be created from the rubble of any failed economic endeavor (or disaster; be it natural or man-made). Health care is and will remain a huge economic engine across every region and jobs will sprout in support. People need to eat and cannot possibly produce milk, eggs and butter in their backyard-and so on. The point is-while some will fall through the cracks-just as they always have under our economic system, most will find a way to go on and even prosper. The fear of the housing bust is simply that-fear driven by overzealous journalists fanning the flames of the 24/7 media monster. The reality is that over 90% of homeowners do not need to move and will not take a loss on their homes. They may cut back spending reflecting their reduced equity and ability to borrow and that will dampen the economy in the short-term but people will not suffer the disaster portrayed by this article-it won't happen.

[mbborak]

Although I agree with the general underlying direction of this article- namely that the real estate boom was a culmination of the consumer debt pyramid that has been growing ever since manufacturing began its long decline a half century ago- I think its conclusions are unrealistically dire. Sure, we may be in for a long economic slump, but once the consumer begins to see more value in saving, this will improve our economic footing and eventually allow inflation to cool and growth to return. Please don't throw the entire economy out with the recession bathwater.

[Malkiel]

Mr. Thomas seems to be a relative newcomer to some of the economic issues. America has been transforming into a service economy ("skills that involve shallow talk!?) for decades, which is why so many places became economically viable without old-economy industries like "manufacturing&qu... or "timber". His figures for income to housing cost ratio don't jive with numbers reported elsewhere (the historical ratio is about 3.25 times income, a not insignificant difference from 4 times income). And most of the refi boom went to pay off credit card debt hanging over from the '80's and '90's, so it's only true that equity went to pay for consumer goods in a sublimated way. As for college degrees having no relation to production, we'll let Nasa and General Motors and Silicon Valley answer that one...

[Al Lawoor]

I was expecting this way back in the late 90's when the boom in the stock market and the housing market was artificially raising peoples equity in their houses and stock holdings. Unscrupulous brokers were asking older folks who had paid of their mortgages on their houses to put them back on mortgage and borrow money and invest the same in the stock market. In fact I had called a talk show and said that this was not right and moral but who listens to sound advice. Another problem was the factories closing and sending productive work to other countries. This could be ok if the finished products returned to the US was sold at the price levels of the producing countries no the big profiteers cannot expect that kind of logic but the people who lost their jobs were no more able to purchase a product produced in third world countries and sold at first world prices. The problem with the profiteers is that they are greedy and short sighted - never look for the long term. They are so foolish to cut the trunk they are sitting on just as long as they can get the fruit from the tree without bearing the consequences. This will take time and as you have said in the article our kids can only down load music and movies but can not mow land because their hands are too soft for that kind of work and even their fathers did not do any digging. I still think education and hard work goes hand in hand its not true that education does not pay but it helps to reason if one can reason to have a better life. I live in Central Europe where companies do not respect older employees. Its a taboo for banks and corporations to hire somebody above 40 years of age. Experience comes after the age of 35 and 40 and they prefer the young as its cheaper but they are willing to take losses from the kids who do not understand the markets or respect the people with grey hair as grey hair and wrinkles for them is something to look down on and not respect as we did in our generation. So this was coming to us and we should now enjoy the raw fruits with a smile on our faces. I do not like to be sarcastic but this is the true nature of life and am not sure if even God will be willing to take us out of this mess. We have sold ourselves to the devil. Even the weather these days is depressing, we are in Spring and it looks like winter.
Al Lawoor

[jmho]

Yes, and if the 10 mile wide metor drops from the sky, then ...

This is more a "faith" based post than a real economic discussion. The basic premise that every commodity will rapidly rise as wages drop (homes too, and stocks I guess, since those are owned by John Q Public) substantially underscore this author misunderstanding of economics.

I cannot find one statement in this whole article that I - or I would say anyonbe with a basic understanding of economics - would agree with.

[nukldrager]

Is there a "Morbid Hazard" rule?

[billddrummer]

This sounds like the ravings of a bitter curmudgeon. Why don't we all just shoot ourselves and save the collective misery?

[sivere]

Start here:

TakeBackTheFed.com

["Magazine-Cover-Indicator"Indicator....]

Price to Income of "4"

is a lot more than 3.5 (said to be a maximum sustainable level often),

or <b> 2.7 </b>, said to be the historical average.

www.usatoday.com/money...

[gwinner]

Somebody let Chicken Little out! While I totally agree with the direction we're currently headed, if this type of thinking catches on it would ensure the collapse of civilization as we know it. Youth will always amaze when they reach adulthood, our economy produces more than what a pick and shovel can dig, markets have cycles, and those who take counsel from their fears will be left looking the other way when this downtrend inevitably reverses.

[mlyn]

"Collapse of civilization as we know it," will be due to the lack of leadership in the US since President Carter warned us about the dwindling domestic oil. We have no energy policy of conservation and renewable energy. The paradigm has irrevocably shifted: Cycles are based on the US consumer and stock markets. They don't work in the new paradigm of other emerging middle classes who are now consuming. Market cycles in the past didn't account for Peak Oil nor Climate Change.

If you want a reality check, go to chrismartenson.com and take his "crash course." Another reality check is in this news article that has kept the wool pulled over our eyes: www.tampabay.com/news/...#

The kids today should go into the agricultural fields and work instead of the immigrants. There are no white collar jobs for all of them. The FIRE industries were our putting all our eggs into one basket (finance, insurance, real estate). Otherwise they should study the kinds of sciences (engineering, ecology, geology, biotechnology, food science, etc) that foreign students are excelling in.

Start growing your own food.

[WAKEUP]

Somewhere between the author's warnings and the "We'll- never-listen-to-anyone... crowd's responses lies a deep and chilling truth: Things are not what they were, just a short time ago, in the United States, and it could get tremendously worse, in a very short period of time. Will things get as bad as Mr. Thomas predicts? I don't pretend to have an absolute answer for that, but I do have a particularly strong hunch that the possiblity of that is all too real. I know that the word, "hunch" is unscientific. I also know that this "hunch" is based on knowledge accumulated from almost fifty (50) years of adulthood, with experience as a soldier, a worker, an executive, an investor, a business owner/employer, a homeowner, and a person who pays close attention to trends, including the eventual outcome of real and/or perceived trends. The ominous trends outlined in this article are not merely perceived, in my opinion. With just a very few more ill-conceived decisions, the government and the financial "community" could place us at extreme risk of a very serious depression. The apparently inherent incompetence of our present government, coupled with the almost breath-taking, unbelievable greed manifested in the runup to the bursting of the housing market bubble have produced a sinister situation in the United States, with repurcussions being felt literally almost all over the world.
Things are probably outside the effective help range of the government, now, although they will continue to jawbone as if they knew what to do (they don't.) We are precariously close to a situation in which it is every man for himself. I have been there, before, in combat, and in financial circumstances. I can tell you you from those experiences that when it comes to that place, optimists are nowhere to be found.

[WAKEUP]

Re my comment, posted at 7:59pm, today: The posting mechanism malfunctioned, leaving out the completion of the first sentence. The missing section would complete the phrase, "...die-hard Optimist crowd's responses..."

[Unbeliever]

Well, I think the man is right but hopefully only to a point. Somewhere along the path to complete and utter self-destruction I hope people are able to learn. I believe the unfortunate truth is that most people today are caught up in the "I deserve it" mentality. Lots of folks have forgotten what it means to earn something. More importantly, they have no concept of frugality. They will be learning hard lessons.

[galewhitaker]

Human history is filled with examples of humans wasting their vital resources to the point that their society collapses (Read "Collapse" by Jarad Deamond) and they end up eating each other. The earth only supports 6.5 billion folks because of cheap crude oil. As the oil used up the people will starve and freeze to death. What the hell there are way too many people on this planet anyway.

[misslupin]

I cannot believe how many comments on here are "this won't happen, no way."

Denial is not a river in Egypt. Let me guess, how many of you postive thinkers are homeowners who bought at the top of the market, and simply don't want to face reality that you overpayed by a few hundred grand?

And who is the complete moron who actually said "The reality is that over 90% of homeowners do not need to move and will not take a loss on their homes"??

Time to move out of the cave you live in and deal with REALITY.

[sivere]

This is a very pessimistic article, but I am afraid it may be true. Whole cities and communities were built complete with prepackaged retail outlets. The cities demanded schools and teachers, police and fire departments. Thousands flocked to these communities due to cheaper housing prices, even whistanding the longer commutes (I am in California, but I see this in other states, too).

These communities suffer the most. If thie scenario painted here is correct, they wil become slums infested with gangs and drugs.

I wonder if inflation hits big time, that housing prices may come back up again, but with few buyers. In many 3rd world countries, real estate is very expensive, but owned by few, and rented by many. This scenario is a 3rd world scenario.

I am not sure this is even a worst case scenario, but more likely a very possible outcome.

We need to let go of the fantasy of the insane financial system we were living and start over NOW. We cannot wait any longer. It is time to


TakeBackThe Fed.com

[sivere]

The link in my last post should be


TakeBackTheFed.com

[forthill]

I always though of myself as pretty cynical, but I guess I am more optimistic than most here. In spite of the real estate crisis (and don't forget, you couldn't give away a house in the early 80's either, although for different reasons), we will change and adapt. Probably painful, but we will change and adapt.

[Avl Guy]

Hugh, your initial 11 paragraphs are chillingly dead on...and anyone who, like me, resides in a ‘tourism & land-development’ city knows that and is witnessing it. Those 11 paragraphs are consistent with my biggest fear which is that the combined deleveraging and "L"-shaped recession will hit incredibly unevenly across geography and economic sector...and the national media and federal policymakers will be chomping on the bit to do what many of the posters here are doing: deny, deny, deny...esp if the hardest hit areas remain outside the major news media centers (i.e. outside NYC, not LA, not Chicago, not DC). If those mega-cities bounce back quickly, the spin meisters will pronounce all is well as frequently as you hear calls of a housing bottom today.
Government economic statistics are co-enablers of such spin-doctors and deny-mavens. As pointed out in numerous blogs, the govt has "Goldilocked"... these three much-cited economic measures: 1. CPI, which doesn’t include anything that’s inflating fast (food & energy, of course); 2. Unemployment rate, which doesn’t include people who are no longer receiving benefits, the chronically unemployed, people forced into SSI, the under-employed, and part-timers who search for full-time work in vain; and 3) GDP, which is plumped up to include all kinds of bizarre adjustments including the (jobs from the business) “Birth/Death” model and fictitious “hedonistic “adjustments (their word, not mine).

Bottom-line: This deleveraging is historically unique. I think it's pollyanish to dismiss such a wildcard and its effect on credit markets and solvency, and the shape of the “post-deleveraged” world. It’s really a matter of how easy or how hard will it be to deny what people are experiencing economically.