“I have this question,” says Dave. “With the current landscape as it stands, regardless of how we got ourselves into this mess, are we in a “too big to fail” type scenario with regards to housing?
“In other words, if interest rates start climbing, and housing starts correcting, and people start having problems maintaining these mortgages, do you think the government will have to step in with stimulus programs that ultimately reward the home owners who leveraged beyond their means?”
A fair query. After all, while US home ownership levels fade and American Millennials embrace the freedom of renting, we have seven in ten families yoked to a house. Our kids get horny over bamboo flooring and polished concrete backsplashes. This week we’ve already probed Erinomics and learned why there are 105,000 new condos being built in Toronto alone. People have $1.2 trillion in mortgages and home equity lines of credit, plus another five hundred billion in debt amassed buying crap. Job creation sucks and wages are stuck. If rates rise, we’re pooched.
So, too big to fail?
It’s a political question, not an economic one. But let’s remember the Obama administration spent more than $2 trillion trying to stem the slide of the American housing market, and failed. In the end, people lost faith in real estate, sold it off, walked away, took the hurt. It declined in value 32% nationally. Today, more than seven years later, prices are still 20% below their peak, despite a big bounce-back in major cities. Collectively, the American middle class lost $6 trillion in housing equity, and government was unable to staunch it.
This forms the foundation of what the doomers were moaning about here yesterday. They decry the structural unemployment, the widening gulf between the 1% and the rest, the food stamp numbers, the 77 million citizens with debts in collection and the fact middle-class incomes have declined by a third since the GFC. This is overwhelmingly attributable to real estate.
The Yanks made a big mistake when they let building, selling and fluffing houses account for such a big chunk of the economy. Just like we’re doing now. The recovery period’s been long and uneven. That much is obvious.
Only now are jobs coming back to the US (another 209,000 were announced this morning), with the economy kicking out robust GDP numbers and corporate profits. Consumer confidence is up and the federal deficit in decline. This is why the Fed can finally throttle back on its stimulus spending, turning off the tap that flowed $85 billion a month, seriously enhancing the wealth of those smart enough to load up on financial assets.
The fact this spigot is closing was one reason investors punted stocks and headed for the exits on Thursday. The Dow cratered more than 300 points since it’s clear the economy is ramping up, with inflation and higher interest rates to follow. Of course a default in Argentina, pesky Ruskies and dead civilians in Gaza just made things more acute. But crises flare and fade. Economies move like glaciers.
The bottom line is that real estate destroyed a good portion of the biggest middle class in the world. The US economy is clawing its way back, but for millions of families the future will never approximate the past. They’re done like dinner. The average 50-year-old American has saved only $43,000, while almost 40% of everyone has saved nothing. Eighty per cent of people over the age of 30 believe they don’t have enough to get by in the future. And they’re probably correct.
Now interest rates will go up as the government bond-buying stops because the economy as a whole is growing again. Stock investors will take money off the table and put it into fixed income, where prices are dropping and yields rising. When equities look cheap again, they’ll pile in and make another bundle, as corporations with global sales keep stacking profits.
This is the new reality for Americans. The gulf between rich and poor will spread, but it’s the gap between the wealthy and the middle that’s really opening up. Millions of families gambled their whole wad on housing going up forever, and lost. Thus, an ownership rate of almost 70% has plunged to levels unseen for two decades. Rich people, meanwhile, watch from afar. They’ve always understood diversification is salvation.
Is real estate in Canada too big to fail?
You really want to wait and find out?