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You will not find
that headline anywhere today. Why? Because it isn't there. It is
a headline from the future.
Instead, if you look through today's papers, the headlines you
get are reassuring:
"Job growth is strong, surprising economists," says the New York
Times.
"Fears of U.S. Slowdown Recede," adds the Financial Times.
David Lereah, Chief Economist for the National Association of
Realtors, says the worst of the housing slump is over:
"As the housing market recovers from its correction, existing
home sales should be rising gradually during 2007 - it looks
like we may have reached the low point for the current cycle in
September. We've entered a more sustainable period of home sales
now, and we expect greater support for prices over time as
inventory levels are eventually drawn down."
A man who likes his women fat and his investment margins thin
must find America, 2007, an agreeable place. According to
official statistics, the average voter is bigger than ever. But
they are balancing on the tightest of tight wires. According to
the financial news, never before have citizens had so little
margin for error.
They read the headlines and are happy to believe them. "The bad
news is behind us," they say. "We don't need any
margin...because there will be no errors."
Yet, this is not the first cycle in the housing industry. It is
just the
biggest and wickedest. Typically, says Max Fraad Wolff in the
Asia Times, housing prices fall 30% in a downturn, over a period
of about four years. If that is so, this one has a long, long
way to go down.
Edward Learner, director of the UCLA Anderson Forecast, makes a
more modest guess; he expects new house prices to go down 5%-10%
in the year ahead. The average house in Los Angeles is now
valued at $510,000. That's about 50% too high, says Learner. It
could take five to ten years to get prices back to normal.
Meanwhile, UBS says default rates on sub-prime loans have
doubled...to 8% of the total. Since 2002, more than $1 trillion
in such loans have been written. And now, many of them are going
sour. In October, for example, foreclosure rates in the
sub-prime market were running 42% greater than the year before.
And in November came news that some of the packaged securities
backed by sub-prime mortgage loans were being downgraded by
Moody's - barely six months after origination. Downgrades are
common - mortgages go bad as people die, get divorced or go
broke. But it usually takes longer than six months.
Behind this news is a story that won't go away:
The Financial Destruction of the American Middle Class - this is
the story we've been talking about for the last three years. The
plot is very simple. Most people do not work for the finance
industry. Most people do not get huge bonuses. Most do not own
Picassos, nor do they have houses in Aspen. Most people earn
ordinary wages. And they have not had a real raise in the last
30 years.
"If we use 2005 dollars and the CPI-U (consumer price index for
urban consumers), average weekly earnings decreased by about $1
per week over the 30-year interval 1975-2005," writes Wolff.
"The folks have thus stopped saving and have taken on massive
amounts of housing and consumer debt."
Wolff continues:
"In 1999, total outstanding household debt was $6.4 trillion. As
of the end of the second quarter of 2006 total outstanding
household debt was $12.3 trillion.
"Household debt has increased by almost as much since 1999 as
the sum total of all debt accumulated by all households across
the preceding 220-year history of the [United States]. In 1999,
household mortgage debt stood at $4.4 trillion. At the close of
the second quarter of 2006 it had more than doubled to $9.33
trillion. In 1999, consumer credit outstanding was measured at
$1.6 trillion.
"Today, this stands at approximately $2.4 trillion dollars,
signaling a 50% increase in less than seven years. This is
usually soft peddled and talked down by comparison to
skyrocketing housing values. Household assets held as real
estate increased by $9 trillion from 2000-2006. This might be
called the mother of all modern bubbles. Yet household net worth
struggled up by a mere $1.2 trillion. Net worth badly lags
housing values because of waves of cashing out. When these waves
crash ashore it will be with
massive destructive force."
The middle class still thinks it is the middle class. It owns
one or two or three automobiles. It has children in college...a
house with
air-conditioning...maybe some mutual funds. But it is living on
borrowed time and borrowed money...in a borrowed house.
Even though house prices were rising, owners' equity as a
percentage of household real estate actually fell from 58% to
54%. In other words, people 'took out' so much wealth from their
houses that they ended up with a lower percentage of ownership
than they had had before - even at today's high prices. As
prices go down, their 'equity' will fall even further. For many
homeowners, it will disappear altogether.
"Americans keep refinancing and re-mortgaging. Why?" asks Wolff.
"There really is only one answer: desperation. Freddie Mac
informs all those who dare to look that 90% of its refinanced
loans resulted in new balances at least 5% higher than the
previous loan."
Someday, perhaps soon, many middle class Americans are going to
begin to realize that something has gone wrong. Their houses
will be falling in price...while their debts are greater than
ever. They will realize that they have been bamboozled.
And someday, a politician will begin to speak for these people.
He will not tell them that they have been fools. Instead, he'll
explain that they have been betrayed by their leaders...swindled
by Wall Street...conned by corporate CEO's and flim-flammed by
Republicans and Democrats.
He will be partly right.
[Ed. Note: Eventually, the average Americans are going to
realize that they've been had - and that everyone, Washington,
Wall Street and the media had a hand in it. Unfortunately, by
the time the pieces are put together, the damage will be done. |
