The story of the Great Recession is one of selective ignorance by those who know the most. The economists and financial reporters who spent years trumpeting the falsehoods about the investment value of single family homes and the utility of easy credit are still given credence. Amazingly, those professionals who missed the $8 trillion asset bubble still have their posts at think tanks, newspapers, and cable television. More amazingly, they are the people that politicians are turning to for advice on how to “get out of the slump”.
I suppose there is some logic behind asking the arsonist who burned your home down for help in rebuilding it, but I’m not buying it. Reporters for the New York Times, NPR, Wall Street Journal, and others still talk about the declining home prices as if they are stocks: they imagine some magical formula will cause a rebound to pre-crash levels and all will be wonderful in the land again. The simple truth of housing prices is that they aren’t falling away from normal levels, they are falling towards normal levels. According to Dean Baker, the celebrated economist on record as early as 2002 about the bubble and its dangers, housing prices are still 15-20% above normal trend levels.
It is natural for people to want the market to come back. The housing wealth effect is worth 5-7 cents per dollar of value annually. It is that loss of construction, construction materials, design, and real estate functions that have sapped an estimated $2 trillion in demand from our economy. We filled some of that demand hole with the $787 billion stimulus law, and more demand was generated via the residual effect of the $7oo billion TARP bailout passed by President Bush. What demand was not filled in still creates a drag on our economy. In some states, the loss of the wealth effect has meant the end of their economies as they knew them.
In my hometown of Las Vegas, Nevada, the construction industry was the one thriving counterweight to tourism. Construction was a beast driven by the city’s staggering growth, and powered by equity loans and the sales of homes at huge profits. The dawn of the 21st Century was the height of the “flip-it” craze; buying homes to be remodeled and resold at a profit. The problem, as we have all found out, is that these homes’ intrinsic values never climbed as high as their market values. We should have seen the writing on the wall years ago; everyone flipping a house new there were options that generated far less market value than they cost to install (the best example being a swimming pool). But nobody imagined that the entire house could fall into that same class.
The collapse of that growth industry has meant an unemployment rate of over 14%, and a sobering under-employment rate. Construction workers, real estate agents, and construction suppliers have lost their jobs at the very time that the ARMS on their over-valued homes were resetting. The downward spiral has been horrific; once the core demand is gone from an economy, there is little that can restart the engine outside of major, direct investment. Las Vegas is our nation’s worst-case scenario in microcosm.
Las Vegas is also the cautionary tale that we must heed this time around. Rebuilding our economy on the same failed predicates of the last one is to throw effort after foolishness. We cannot afford to measure the strength of our economy by the measures of our asset markets. While the markets remain important, the true measure of our economic potential lies in our working consumers. They must be able to obtain jobs that pay living, working-class wages, and those jobs must be in applications that build real property that is in demand.
It is well and good to talk about the supposed job-creating machines of big business, but it is the reasonably paid worker that drives both the business and the consumption of its goods. In the final analysis, we need to reset our national goals for this recovery. Homes are meant to be lived in, and should be considered an asset in one way only: they can give you a rent-free place to live in retirement.
The Rational Middle is listening…