Jitters

March 20, 2006
      An acquaintance told me a weird story yesterday. Let's call him "E." He runs an Internet consulting company here in Saratoga Springs. It employs about twenty-five people in a downtown building E put up a few years ago.

       Last month a freak windstorm ripped through here and took down the electric power for three days. E lost communication with the payroll service (a separate company) that issues his employee's salaries. The storm happened in the middle of the day, Friday, payday.

      The power came back on Sunday night, and on Monday two of E's employees each asked for private meetings with the boss. Because of the storm, they said, the payroll company had failed to make electronic salary deposits in their checking accounts. They were concerned because they were late on their mortgage payments and without the past week's electronic paycheck, they couldn't pay their mortgages.

     E told me that these were "high-level employees" with substantial salaries who were both living in "very high-end homes," which around here would mean around a half-million dollars (and I know that in some parts of the US, like Washington, DC, or San Francisco, a half-million barely gets you a "pre-owned" raised ranch). He said he was shocked to discover that his executives were living from paycheck to paycheck, in houses that by normal criteria (i.e. pre-bubble standards) they probably couldn't afford.

     "What if something happened to me?" E said. "What if I was hit by a bus? That would be it for the company. That would be the end of their paychecks, and what if they didn't find another job almost immediately? I don't want to interfere in their personal affairs, but I can't help feeling that I really need to talk to them about this."

      Meanwhile, our cretinous, pandering local newspaper, the Saratogian, published a special real estate section on Sunday under the banner "Progress 2006." The headline under the banner said, "If You Build It They Will Come," and the accompanying photo showed a rank of beige McHouses in a new subdivision. The sub-head said "Growth is the name of the game across the county."

      Spring here in the North Country brings with it a ripe expectation that the winter real estate doldrums will soon yield to raptures of zippy sales. Of course this is based on the assumption that the year ahead will be like the recent years just past, only better! The sense of momentum in the real estate markets is reinforced by the fact that so much stuff has worked through the arduous permitting process and is just now coming up for sale, with even more stuff behind it moving through the cloacal pipeline, so to speak -- so therefore the buyers will automatically appear drooling into their checkbooks.

     I don't think so. I think that what we are getting here is stupendously delusional behavior. The ebullience in the newspaper only tells me how much unexpressed subconscious terror lurks just below the surface of wished-for "normality." For one thing, anybody who walks around this town can hardly fail to notice how the realtor's signs are accumulating in the front yards. Nothing's moving. Outside of town, in the suburban asteroid belts that only ten years ago were cornfields and cow pastures, there's a much more lavish supply of new houses. I detect an odor of bloodshed.

     This has been a hot market for a while, because Saratoga is an historic "main street" town in pretty good condition with a high level of cultural amenity, close to the gigantic Adirondack Park. The three old cities nearby which comprise the employment centers of the Capital District -- Albany, Schenectady, and Troy -- are in such a state of squalid decrepitude that practically anyone gainfully employed has fled shrieking lately, and Saratoga has attracted many willing to tolerate a 30-plus mile commute.

      For years following the two oil crises of the 1970s, the real estate market in Saratoga fell stone dead because the fear of rising gasoline prices and long lines at the filling stations remained so vivid. We're headed back to scary gasoline prices again, only this time it will not be a temporary crisis. And this time, there will be a huge surplus of unsold houses. There will also be a substantial number of house owners getting in trouble with their mortgage payments, and one way or another their houses may end up adding to the supply of available houses. There is also very likely to be trouble in the financial markets, with dark implications for the value of the US dollar, for the movement of interest rates, and for the availability of further credit.

      It makes my head hurt to imagine the coming carnage on the real estate scene here. Nation-wide, the latest figures are not reassuring. Even hot markets cool off when evil economic winds blow. According to the California Association of Realtors, sales of existing, single-family detached homes were down 24.1 percent, the highest year-on-year decline since December 1990 when sales dropped 25.2 percent. The National Association of Realtors reports Massachusetts home sales are down 21 percent and listings up 41 percent. In Florida existing home sales are down 19 percent. In Alabama existing home sales down 21 percent and listings up 17 percent. Pennsylvania sales down 17 percent. Minnesota sales down 7 percent and inventory Up 35 percent.

     Meanwhile housing "starts" (under construction) jumped 14.5 percent in January of 2006. Permit approvals were up 6.8 percent. That old dawg, momentum.

     House "affordability" reached a 14-year low according the US Department of Commerce. Foreclosures were up 27 percent so far in 2006.

     You wonder, finally, how many current homeowners will lose their houses? How many developers will lose the shirts off their backs? How many banks will get stuck with foreclosed property? And how will the United States economy function without a phony-balony real estate bubble market driving it?

Comments

[Jeff Schultz]

Posting early, eh? At any rate, the answer to your last question is: "We are screwed". M3 is going to stop being published (Unless House Bill 4892 - Introduced by Rep. Ron Paul to keep M3 being published weekly is passed) The powers that be know it's coming. I think nobody knows what the hell to do.

The people who are loaning us the money to keep living this way are afraid to change. If we can't buy our Japanese cars, who will buy them? The fact is that as it stands today, if the status quo changes, there will be GLOBAL pain and consequences felt.

The $64,000 is how long can this continue. People don't change until the pain of not changing exceeds the pain of staying the same. I think it's only a matter of time before the next economic shock that we wont recover from happens.

All I know is one thing. There are interesting times ahead!

[kd]

Great post, Jim.

*

Yesterday Saturday) we were returning to Austin after a morning San Antonio visiting my wife's folks. Nearing San Marcos, we saw sign after sign advertising a "factory outlet mall" with over 100 stores. Never been to one of before, so we deicided to take a look. It was utterly surreal. Acres of parking lots filled with SUVs packed with obese families in shorts, tennis shoes, & basball caps. Most of the people (male & female) looked like "guys"--the kind you'd normally find slumped on a couch watching "the game", a beer in one hand & a bag of chips between their meaty thighs.

We walked past shop after shop after shop. And hundreds of people. Probably from the many suburbs that surround Austin & San Antonio. There were license plates from Mexico, too. And as we moved with crowds, we heard Spanish, various Indian & Chinese dialects. People carrying huge bags like it was Christmas. I asked a salesperson about the crowds, & she said it's like this EVERY Saturday & Sunday, all year. An eternal Christmas "rush". Teenagers flashing credit cards. Children screaming for this or that. Dazed elderly persons. A kind of mania in the air, & subtle panic/agression -- especially in the long lines to get in & out of the parking lots.

Where does all this "stuff" come from? Who makes it? Where do we put it all after we buy it?

What else is there to do? Where else is there to go?
Shop, eat. Eat, shop.
Go to a movie. Drive around.
Eat. Fuck. Sleep.

Sit in front of a television or a computer. Talk on a cellphone. Live from paycheck to paycheck.
Listen to reports of "the war".
Read another magazine. Go back
to work on Monday. The comfort of unanimous stupidity.

[kd]

Sorry for the first sentence. Here it is again: Yesterday (Saturday) we were returning to Austin after a morning in San Antonio visiting my wife's folks.

[aisling]

A close friend of mine, here in Southern California, does "take offs" (figuring materials required to build) single family homes.

Two months ago the large developers, those listed on stock exchanges, were in a panic to get all their projects through and built. He was told there wouldn't be any more coming.

With typical American optimism, the cancer of suburbanism spreads up the foothills and almost everyone goes on, business as usual.

[BigBill]

The company I am contracted with, DHL (I am an employee of an IC--independent contractor--that is contracted to deliver and pickup packages for DHL; we wear the uniforms, drive the vans, and in all respects are DHL employees except for the fact that we are paid half as much as our corporate counterparts in the larger cities like L.A. and Chicago, none of the benefits, and none of the job security associated with belonging to the Teamsters), is undergoing it's own peak oil crisis, although it doesn't know this yet. It is utterly dependent on moving most of its packages via air, and it relies on both international and express packages to balance the books, as most of its ground moves through the network at or below cost. In the U.S., where it desperately wants to expand its global dominance, it is running a considerable deficit ($600 million last year, $300 million this year) that is a drain on its overall financial health. A great deal of the packages that we ship would qualify as junk, dependent on "free" shipping and an abundance of credit. Add in the many service problems experienced by a rapid turnover in their contractors labor force, and that they are draining their IC "partners" dry (several hundred have gone bankrupt [both as affiliates of the previous incarnation, Airborne Express, which was bought out by DHL, and the current incarnation, DHL], many are going broke; one IC I know of is running a deficit of several thousand dollars a month, and his is a typical scenario), DHL isn't the picture of fiscal health. Which leads me to wonder, how will such a business, especially one predicated on the global economy, and reliant on a steady stream of revenue from consumers who don't mind paying for overnite packages, survive PO? Given the state of mismanagement down in Florida, and the lack of attention manifested by the parent company, DP (which is hellbent on acquiring as many logistics enterprises as it can), they in all probability won't. Nothing is being done that I can see to grasp the fundamentals of this coming change, that we will run out cheap oil, that this will have a significant impact on people's ability to buy consumer goods and have them shipped through our network, that continued expansion will not go on forever. My industry, I'm afraid, will experience some of the fallout that comes from a housing market collapse, as well as the gradual distintegration of the airline industry and the raising of fuel prices. Compared to our rivals, Fed Ex and UPS, we are anything but efficient, adopting a slash and burn policy that is felt mostly by the customers and the IC's (and their employees!), all in an effort to pad the pockets of a handful of management types. DHL, like the rest of the states, is in an incredible mess!

[CRL]

Ironic to hear you talk about Saratoga Springs, we just passed thru there a few hrs ago heading back from an Adirondacks trip. Yes, you are correct, that new Marriot hotel on Route 50 is heinous! We half expected to see one James Howard Kunstler trolling the streets of Saratoga looking for new real estate signs. One side note - they are renovating the old hotel on Main St, a good sign. With regard to the real estate bubble, it is huge and it will be interesting to see how it unfolds, will it pop or slowly deflate? I think the Spring season will tell a lot. If you think the bubble is bad in Saratoga, check out DC, or NYC, or Boston. These cities are unreal right now. We have even discussed moving to Saratoga because it isn't a bubble mkt!

[Brad Anderson]

Telling all the scary details is fine. I think America is quite terrified... of the wrong things. But we deserve to be afraid given our idiotic attitudes toward the world. Well, regardless, America needs to be terrified of the economic future.

I believe that there should be some balance. There needs to be a VERY LONG discussion on how to fix or at least lessen the coming crash, be to hard or soft. Making sure that the M-3 continues to be published is the tiniest baby step toward getting over the crash. (it would be a measurement of health of the economy, that is).

I have a few high level ideas of what to do. Not that they will ever get implemented. So both high and low level ideas should be generated and discussed. Like, I moved to location that is walking distance from my work. I haven't been in my car for 8 days now. Driving is a once or twice a week activity... usually travelling no more than 3 miles. At this rate my tank of gas should last about 2 months if not more. It's not even a hybrid.

[Weaseldog]

For some reason, I've watched more televisoon today than I intended.

MSNBC had a story on the human tragedies in Darfur and Chad. They sent a camera crew there, shot some footage and talk about the misery.

Not one word was dedicated to explaining why this is happening.

I don't believe that their camera crew and those doing the interviews could not have heard that the world's hunger for oil was behind these tragedies. I find it difficult to believe that they didn't hear that oil production is ramping up quickly in the deppopulated areas.

So I have to assume, they purposely withheld the facts as to why, how, by whom, what will happen next.

There was no mention of Dutch Shell. No mention of who's paying for the rockets, mortar rounds, ammunition, supplies, helicopters, etc... Sure they're picking up used equipment that doesn't work well, but next time you see an undocumented worker in the US working for mininum wage, ask yourself, how someone in a 3rd world country making less money that that worker, is able to place an international order to an arms dealer, for a used and beat up, military helicopter? Then pay for basic maintenance and fuel to keep it flying every day?

All of this is taking place, though to keep gasoline cheap at the pump. If Dutch Shell and others had to pay lease rights to villages with ancestral rights, then a business guy living on the edge, might not be able to afford the hummer he drives as a SOV, as he passses through Sarasota on his way to design sprawl.

[savetheburbs]

JHK,
Lets see if i got this right, the cities are crumbling, the residents are fleeing, the suburbs are sprouting for sale signs like teenage pimples on a first date, the residents are fleeing, you didn't include the ravaged south, that has lost over 300,000 homes, where are all this people going to live? Are you predicting some Grapes of Wrath? Example. Lose mortgage broker job, get foreclosed on, pack the second hand Explorer up with the playstation or Xbox360 and wander the freeways until the gas runs out and then live in that Explorer? Those that made unwise financial decisions will have to deal with that, is that a PO prob?
How about all the people that re-fied and reduced monthly payments?
Forget our political leaders, get the torches, the hoes,ballbats,rakes, attack the suburbs!!!!

[Jerry Johnson]

Lessening this downturn depends entirely on preventing a cascade of economic catastrophes.

The mainstay employer in america today is construction. Therein lies the most volatile and potentially greatest cause of a cascade.

One main trouble spot will be preventative layoff's that have been so common since the late eighties. Here is the engine that will start a cascade.

The next trouble spot will be when banks pull the plug on construction projects in the preconstruction stage. This will be a very early sign. Developers borrow in one form of non recourse financing or another if they wish to stay alive. Housing developers already face this . Jim's comments make this clear.

Since housing developer inventories are high , new units will only saturate the market. I do not know the extent, it must be high given the market the last few years, but many subdivision projects themselves must be syndicated non recourse. The housing developer makes his money from a sales commission with the house and lot profit being syndicate profits that the developer is part of. It is a sine quae non that development of the land base is financed non recourse. This technique always arises late in a housing boom. Above all smart developers survive because they know recourse financing is a ticket to bankruptcy.

Naturally, trade layoffs will be steep. Since much of the market is non union, these areas will suffer the greatest hit the fastest.

Trade layoffs kill off the subcontractors very fast in a downturn.

My own experience is in very large scale general contracting. Here, typically 80 % of the work is subbed out. The typical major metro market trade is dominated by around five major firms that control 80 % of the trade. These firms are typically closely held by traditional contracting families. Usually, very reactionary types. My own observation inrecent years is that the children of the family consume every pocket of the business . These firms have little leeway for a decline in jobs without facing insolvency. That said, they are very good at living with insolvency for long periods of time. They simply milk the thing to death rather than layoff kin infesting the place.

It only takes one or two failed sub's to kill an entire project to a heavy loss. Today, few subs are bonded because the owners will not pay the bond. This is a vast subject I have much experience in helping to extricate the general.

Now comes the heavy killer. Panicky banks eventually look for a way to shut off projects under way. I saw it happen in the early eighties and nineties. This will be the killer of the less well healed general and with it goes an awful lot of jobs. This time around the banks will really panic because they are mostly on the hook for construction loans for large scale projects. This stuff is not laid off to FNMA or the mortgage trusts. A big area here is health care , corporate structures and condo projects in large cities. Huge backlog underway here nationally. Everyone I know of has an all time high backlog of unexecuted work. Another sign is that owners of these large projects are experiencing or starting to experience slow pays by the owners. They haggle over everything till the project nearly falters to avoid another draw from the bank. This is an old story that is now accelerating.

Another source of trouble is that slowing the project down eats into the general contractors budgeted "general conditions" so that as the project matures the project staff cost is eaten by the general. That is when the general slides if the GC is not astute enough to head the problem off as it arises. Most have lost the touch here.

Laid off workers default on down the line. Given the figures cited in Jim's blog it is obvious that we are well into the protective jettisoning of inventory stage. With all those nearly new houses held by speculators going on the market all at once, pressure will build to make financing these sales as difficult as possible to aid the sales of developer inventory. One is a financing decision. The other is the same financing decision plus helping to save an ongoing customer and the trades already financed inventory.

Who would you help first, your golf buddy or some schmo you have no connection too? Of course, FNMA steps in the picture here, but not for the Jumbo Market! The Jumbo's and Super Jumbo's is where the critical first panic dumpimg will make the greatest dent in resales.

There is guy across the street and back in the woods who has a $700 grand house up for sale. My little house is $200 grand. I live in a 2000 Sq mile county of 30,000. Half live in the area of the county seat. There are at least 15,000 second homes and condos in the county. There is little or no market for these places in a panic mode.

The mortgage servicers will be quite busy operating housing developments as the developers "give them up".

This is just the start. This is what happened in the late eighties and early nineties.

Of course, there are all those spec office buildings out there that have a few tenants with a lot of non built out space. They will be kaput too!

All in all, we will have a trillion dollar failed cash flow problem, perhaps a lot more by the end of the year.

Fixing it first requires establishing the nature of a complex problem and it's extent. Next would come retailing inventory liquidation with credit cards maxed out and minimum's increased.

[drywhitetoast]

"The mainstay employer in america today is construction."

Do you have any sources to back this up? If this is the cornerstone of your argument I'd just like to know that it's not merely an assumption. By 'mainstay', are you saying construction employs a critical mass of people such that if a significant percentage gets layed off the economy is affected definitively? I feel like we've seen a ton of layoffs and jobs being outsourced recently with very little impact so far.

[donna]

drywhitetoast,

Here's a table from the Bureau of Labor Statistics you might find interesting:

http://www.bls.gov/news.release/ecopro.t01.htm

(The above table is from the BLS webpage about its 2004-2014 labor projections:

http://www.bls.gov/news.release/ecopro.nr0.htm

[drywhitetoast]

Donna, thanks for the links... looks like about 5% of all jobs are in construction... and yes that's significant. It probably gets a lot higher when you add in all the realtors, developers, building supplies manufacturers, contractors, and the supporting retail chains backing them up, not to mention all the speculators, flippers and real-estate infomercial adherents who will now have to change careers to picking stocks based on whether a mysterious green light shows up on their computer screens.

[kd]

Excellent post, Jerry.

*

Thinking more today about our visit to the "factory outlet mall" & the acres & acres of sub-divisions spreading over the once clean, simple landscape of central Texas--it seems we're already living in sci-fi dystopia.

Then I read an article tonight about a new film by Mike Judge called "Idiocracy"--about a future in which the U.S. population has become "incredibily" dumb. The future? I don't think so.

Jerry, the construction continues at the gigantic outlet mall--more shops, more land cleared for parking lots. And more outlet malls are planned along I35. Looky, there's a Saks 5th Avenue where Grandpa's farm used to be! Glory be!

More cheap housing, more freeway overpasses, more shops, more fast food restaurants--to the average Joe it must seem like "growth" is limitless. God's abundance!

President Bush told us to get out there & shop. Yes, Mr President. For God & country!

[Jerry Johnson]

I will have to hunt down combined numbers. It is not that difficult to establish my case by other means.

All taken together, construction is the largest payroll in America. What do you think replaced manufacturing in America? The landscape is littered with millions of houses of office buildings and shopping centers. Where are the factories? I read library copies of JHK's real estate books or I would check there.
Been in the business for more than a generation.
Construction includes development, construction services including maintenance both general and trades, material suppliers, architects and engineers. They are all very interrelated. Where would lumber be in a 25% downturn? Concrete is huge and entirely domestic. Consider HVAC, most of the material value is put together in a factory.

Housing and Commercial are the largest two segments. They are going to be the two segments in the most trouble. Industrial construction is domestically attenuated these days. Brown & Root, Bechtel etc have a lot of overseas business these days.
Keep in mind too that construction is very labor intensive resulting in greater than usual number of employees. Even imports of masterials are far less than say retailing or auto manufacturing.

The numbers are published in ENR. I also am a retired member of the Construction Financial Managers Association. I will try to find numbers there.

[Ben Arnold]

Let me tell you about "E's" employees: They are young, they have families and a mortgage. They live paycheck to paycheck because they are young (no accumulated savings), they have families (kids ,and women especially, cost money), and a mortgage. At some point the employees made a value judgement: long commute/affordable housing in the suburbs or short commute/expensive housing in the city. "E's" whole act seems a bit pretentious. Most everyone I know lives at the limit of his income, paycheck to paycheck. This isnt a circumstance of being dumb (or in need of divine guidance from the boss), its a circumstance of living in the real world trying to raise a family. Some people may choose to pay more for housing in return for a shorter commute (and a "spa" vanity plate so they dont get stereotyped by kd). The City of Saratoga Springs chooses to provide only large-lot homes and condos for its residents, "E's" employees really dont have a choice. I dont know, I just get this crazy feeling like maybe "E" is perhaps a little bit thrifty and is feeling a bit of suppressed guilt over not paying his employees enough ("high-level executives" should earn enough to pay a half-million dollar mortgage). Then again they could be putting their entire salaries up their nose, in which case perhaps a sit-down would be appropriate.

[snuffy]

I am tied now to this industry.After the end of the 'Three Mile Island'mods I was useing my old Inspection credentials to find work...I ended up at a small lab here in the nothwest that does construction inspection,and 3rd party verification of compleated work....What the state used to do before they realized they could authorise special inspectors,and not have the care and feeding of the workforce needed to insure code compliance.We are tied to the health of construction biz.
Fortunately,it is not the residential....more highrise and tilt-panel construction,but I started seeing this shitstorm coming last year when I was driveing by finished buildings that I had inspected ....still empty 1 year after completion...got that cold chill then.
I think I will have work for a while as the Really big projects have a life of their own,and are hard to kill[a person hates to have a really big blunder tied to their neck]
On a bear investment board,they pointed out the 8 largest contacting/construction outfits are down 25to75% from last year.They also pointed out the markup for a house is like 40%....which means they can drop their price way ,way below what a average joe can drop to move inventory...which insures joe&mama6-pac will be the first ones hurt bad in a houseing bust
{Wife and I just paid off the second morgage[YAAHOOO]and are useing funds freed to continue a prepayment on primary,as well as continue our own "powerdown" preps.My place is at the end of a dead end road,and I am thru traveling as is my wifey}

One other advantage I have going is the new ICC codes....they require special inspection of EVERYTHING...which means more work for the special inspector,even If there is less projects.My company is also loath to lay off people as it is very hard to find qualifed bodies.They cut your hours to 1/2 time for a long time before cutting meat.Oregon has always had this 2year 'thing' where It takes a longer lead time for economic trends to show here than eleswhere in the states.We are just now getting a boost to the economy,at least enought to see the steel shops full of work,but I can tell lots of people are looking over their sholder,and not takeing any chances...the smart ones anyway.

[AH]

I've been to San Marcos many times from Houston and I know EXACTLY what you are talking about with their outlet mall. I think it is the largest in Texas and the whole thing gives me the creeps. We usually go once or twice a year casue my family is obsessed with it and loves to buy shit they don't need. Of course, I buy something on clearance or closeout buy usually it will just be pants or shirts. I bought my surround sound thing at the Sony store in 1997 and for that I am ashamed because it was like the completely wrong thing to do. Well, hell I was 19 and gas was 99 cents back then so I did not know better.

You should go in the peak summer months when the schools are all out of session and the temperature is hovering around 100 degrees. The people are just scary in those conditions because they will be sweating like pigs and short of breath in the humid baking air but will still go shop to shop to try and get deals. The parking lot is packed to capacity and the cars will stalk you to get your space when you go back to your car. That mall is symolic of everything wrong with our culture; materialism, greedy, selfishness, outsourced goods, consumerism, name brand to feel good, etc....

San Marcos is a great town though. You should have skipped the rotten mall and gone into town on the other side of I-35. The city park that the San Marcos river flows into is lovely..

If you go further south on I-35 and exit to go to Lake Canyon which is about a 30 minute drive from the highway you will be pleasantly surprised. Smoot me an email for more info if you are interested.

[Omri]

At this point newspapers cannot be excused for puffing up real estate. It's corruption at work here. THey need the ad money, so they dare not report about the manifold indications of a bubble deflating. I do know, however, that many folks in Wall Street are giving thanks to God & Company that the bubble is looking to deflate rather than pop overnight.

[Dumas]

Ah, yes, one more example of the Hand-to-Mouth existence - tragically so prevalent in the US. I regret to report that this is also increasingly happening in Europe – it’s one of America’s most successful exports in the era of globalisation! Large debts and barely rising real incomes keep people scrambling to plug the ever-increasing holes in their living expenses.

In this little European backwater that I currently call home, the housing bubble arrived a couple of years ago on the heels of a consumer and mortgage-lending explosion. Lending to individuals has been zooming at 30-40% annual rates. Household debt has gone from 10% of GDP to 37% in just 5 years. Managing and shuffling loan payments has become a novel monthly exercise for far too many people. Balance transfers and rolling personal loans between banks are the very latest gimmicks in the struggle to stay - barely - afloat.

On the housing front, smallish 1.000 sq. ft. apts. in town go for $400.000. Single-family homes in the suburbs are over a million and can easily go over $3 million. The local versions of McHouses are attached condos (maisonettes) and go for upwards of $750.000. Buyers in no way can afford to pay cash or get long-term fixed-rate loans (avg. incomes are too low for that), so 85% of all mortgages are floaters with low introductory teaser rates (2.5-3%) that ratchet up later. The latest abomination is the interest-only floater that lets you pay just interest for the first 3-5 years. In these ways, buyers can "afford" to pay ridiculous prices for homes, since initial monthly loan payments are low. What happens later? God will provide...

Newspapers, too, are full of regular weekly supplements extolling real estate as an investment, etc. But the real estate classified section is getting ever fatter, signifying that houses are remaining unsold longer.

Banks are fighting for market share; so lending practices are still very lax. The result is that the percentage of loans delinquent 100+ days is triple that of the US – even though nominally overall indebtedness is lower. Banks hope that people will rather do without other amenities (food? clothing? health care?) than lose their homes to foreclosure. I think banks are deluding themselves, particularly since a strong local populist tradition makes home foreclosures a difficult and time-consuming exercise in the courts (at least two years - a rare plus for the people).

Commuting over long distances is not prevalent here (it’s a small country) – but the latest craze is SUV’s, particularly the large super-expensive guzzlers like VW Touareg, Range Rover and Porsche Cayenne. I believe we have the largest per capita sales of the latter model in the world – or close to it. They are all leased or financed, of course. Our used car lots are already filling up fast with 1 or 2 year-old expensive SUV’s – all from bank repossessions.

The SS Conspicuous Consumption and SS Housing Bubble have alas arrived in Mare Nostrum after the usual time delay. They dropped anchor in our waters, but the debt tsunami is not far behind and it is only a matter of time before they are shipwrecked on our rocky shores. And many shall “go down to the sea in ships”.

Believe you me, the US is not alone in excess.

[Patrizia Broghammer]

A man who wishes to borrow 10 dollars is a beggar, a man who needs 5'000'000 dollars is-obviously- a serious business man.
But the moral of this tale goes further.
The weak man is kicked around and despised until he becomes VERY weak.
A man who owes his bank 5000 dollars gets rude letters and threats.
But if you are unable to give back 500'000 dollars you are in a commanding position.
No small bank manager likes to report to head office that he had made a silly misjudgment, lent without security and lost a lot of money.
On a different level: there are a lot of Third World countries that are, they say, almost bankrupt: at the same time they have only to whistle to get a few more billions from the World Bank and others because their bankruptcy would cause havoc and ruin on the international money market and many large banks would fail all over the world.
Their only strength is their weakness.
Weakness rules the world.
But it is not so easy to be weak.
To achieve real, heart-rendering weakness requires a certain type of character, a certain amount of cunning and, in most cases, a great deal of bad luck.
Fortune is a whimsical deity and she frowns only on the chosen few.

[Mike]

Morning gang-

My wife is fond of watching a few cable networks (HGTV, DIY and a few others like it) that seem entirely dedicated to "Home Improvement," including "improvement" of the garden & the yard. "Improvement" always seems to entail spending money on tools, materials, consultants, and other bits and pieces of the "improvement" trade. Not sure why they function as anything but a tease to her, and we rent and don't spend much at all on these types of things. But she watches anyhoo, probably cursing me for not being filthy rich and flush with cash & credit. Oh well.

I'm sure many of you have seen or heard of these channels. Two observations:

1. The biggest advertisers, show-after-show, week-after-week are (a) purveyors of whatever "improvement" bits & pieces are in play on that week's show, and (b) bank cards, credit cards, debit cards, home equity loans, and other forms of usurious loans. Home Depot & Citibank. Target & Bank One. Benjamin Moore & SleazyLoans-R-Us.

2. Over the past six months or so there were a number of shows with topical titles like "Flip this House" or "We Must Close" (only one of those names is fictional). Some monstrous, Texas housewife type, complete with heels, big hair, too much make-up and a vocabulary containing a perfect 1:1 ARMs-to-Y'alls ratio would harangue a couple into what they'd need to buy to "Flip that House," or improve their McMansion to insure 200% family indebtedness. "Oh, thank you, Shirley," they'd coo, grateful for her insults and the keys to the red-ink cabinet, "now we feel like a *real* American couple: big house, big debt. We've arrived."

But this weekend I saw "Improve to Sell," or something similarly named. A show about how to spend money "improving" one's home in order to try to get an offer "at the expected value" for one's McMansion. Oops; was that a bubble I heard bursting?

Of course none of the sellers was a desparate shmuck, looking to dump his home at 75% of what he paid a year earlier, hoping to keep foreclosure at bay. No, these folks were "moving on to better opportunities," or "looking for a bigger home with baby #3 on the way," or some similar tale. Needless to say, the programs did not show the newer, "improved" homes to which they were relocating.

And in this case, Shirley was a slighly-less-smiley Texas housewife, heels and humor both a lil sharper than before, telling them that their kitchen cabinets looked "shabby & outdated," cause there was "no easy way to say it." But the lesson was easily graspable: spend more on your house NOW or you'll never sell it for anything approaching what you thought you'd get in your worst nightmares."

The Nightmare's just beginning though. I suspect advertising bucks from kerosine or propane companies soon, in sponsorship of "Burn This House," or "Insure This," or some other arson-inspired "improvements" show.

* * *

When the mainstream catches on to "The Bubble," and it seems they have, there's nowhere for home prices to go, but down. Unless the Fed finds a new place for excess liquidity to go, we'll get a recession and/or hyperinflation by year's end. I expect Bernanke to do something to avoid the latter, if only to avoid political fallout pre-November. But then I don't know how he'll camouflage the recession.

Strange Days, Indeed.

[Mike]

Housing Bubble, Exhibit A:

http://news.yahoo.com/s/ap/20060318/ap_on_fe_st/ebay_town

I saw this not 5 minutes after posting that last thing. Wow!

[nostalgia]

Nice to see peak oil somewhat fading in Kunstler's writing - it seems as if the bubble bursting will be enough to scour suburbia from America.

Maybe.

A remembered bumper sticker slogan from the hell that was Northern Virginia in the late 80s along the lines of 'God, give me just one more boom, and I promise not to piss it away.'

I guess it was the people pissing away this boom that thought irony was dead.

Sadly for them, the math remains the same - well, actually, it got worse (neg-am - you pay them to have the privilege to pay them more?!? WTF???), but would do you expect in America, Inc.? I love the expression 'underwater,' too - I don't remember it being around the last time a number of people drowned in mortgage debt. And back then, it was even possible to have some sympathy for some of the families, since such dynamic and innovative all-American economic practices as using appreciating home values to pay your growing credit card bill were essentially unknown. Well, actually pretty much illegal - 'stated income' and 'no doc' were called fraud by the end of the S&L crisis - remember that one? - since it seemed to add up to no money to pay the bills when they came due. Though in the S&L case, the stated income and no doc related to non-existent buyers/renters, unlike today, where quite literally, they know where you live. (Anybody run across the idea that the 'boom' was just a case of ever more gullible idiots buying each other's credit card bills, hoping the music wouldn't stop until someone bought theirs?)

Schadenfreude - such a fun German word. You might want to look up 'Insolvenzverschleppung' to get a feel of the American economy over the last decade or so from another perspective.

[steve duncan]

Bottom line: When the shit hits the fan the MSM, squawk radio, the administration and Republican leaders in Congress will all unite in a feverish effort (ultimately successful) to convince the electorate it's all the fault of liberals, gays, atheists, feminists, academics, students, Muslims and Mexicans. The only solution will be 4 more years of Republican rule to straighten out the mess the Left has made of the world.