It’s A Bubble Bath…

Got Savings?After feeling like such a brooding nag in my last post about a cliff-notes depth look at the sacred texts in Islam, I thought I’d follow up with a nice 1-2 combo on something equally dour and that matters to you and just about everyone you know: the future of your economy.

Yeah, I know, we’ve seen bubbles come and go, even in recent years, and no doubt we’re still standing here. Yet, paranoia is a healthy instinct: it means the difference between a proactive and reactive existence — between thriving — and just plain surviving.

The bottom line: I’m a bit concerned about what the slowdown in the housing market means for us folks without the gold-plated cellphones.

I am a homeowner, but I don’t lose sleep at night worrying about my equity, or if I’m going to be able to flip this property in 5 years for a huge profit. We paid too much for our house, probably, but got a smart fixed rate mortgage, and I don’t mind staying here: it’s a cool town and I like the people. In short – I’m no investor or speculator. However, I do sometimes lose sleep over the health of my business — and like many businesses, my little web development company depends on customers who have a demand for our services.

When I drive through Nashville, I see a lot of people working in the housing industry. The housing industry is more than Realtors, builders, contractors, plumbers, landscapers, architects, mortgage brokers, and investors. The housing economy is a massive force that employs people who buy cars, toys, expensive steak dinners, and websites. Especially websites. Real Estate agents and builders know that they need a website these days to be competitive, and that has meant good times for our company.

But just because my livelihood is not in thanks to a large corporation, or great bureacratic institution, doesn’t mean that big slides in the housing market can’t effect everyone.

The scope of our booming housing-related job market varies regionally, and from town to town. Here in Nashville, it seems monolithic — just about everyone has a close friend or family member who works as a broker, builder, or somewhere in-between. A lot of boys put on tool belts in the morning ’round these here parts. Sale signs are around every corner in every nieghborhood. New developments have spread like wildfire through the beautiful farmlands around the Metro area.

On the other hand, in my hometown of Kingsport, TN. the boom is not such a significant part of a relatively stable industrial economy – not a lot of volatility there.

Florida is a different story. One estimate claims that 1-5 jobs are housing related! Many areas of California are similar. Even beyond the direct impact in hot markets, a housing crash will influence general demand for goods across all sectors, which will influence the bottom lines of manufacturers and big business too.

Yadda yadda, sure, the bubble talk is old hat, I know, but this time it really is different — look at the numbers: last week the gubment report on new homes sales came in at a solid 35% drop [thump!&^#], and that is only part of it.

A report in US News and World Report says, “the market for new homes may be in worse shape than the government’s figures show because they don’t take into account rising cancellations reported by many home builders in recent weeks.”

The numbers for pre-existing homes are similar, for obvious reasons, and it looks like the market is finally hit the top of the proverbial roller-coaster. But the point here is not to make you freak out about your real-esate investments, but to point to bigger problem: the fact that all these housing-related jobs have hidden a general trend in our labor economy. If not for the housing industry, Americans would have to do something else for a living. What?

As a report in The Economist notes that the recent housing boom, driven by unusually low federal rates, has propped up our economy more than any other factor, and such a ‘crutch’ is not something we’ve tried before historically. This new approach to monetary policy was a “theory” by Mr. Alan Greenspan, an Ayn Rand Objectivist who claimed in an early 60’s era dissertation that mortgage re-financing, driven by low fed rates could act as a safe buffer for the normal boom-bust cycles of capitalism.

We’ll see.

Just consider the statistics: the Economist states that over the past five years, consumer spending and residential construction have together accounted for 90% of the total growth in GDP. And over two-fifths of all private-sector jobs created since 2001 have been in housing-related sectors, such as construction, real estate and mortgage broking. Without going out on a limb, I think it is a reasonable assertion that consumer spending was driven by second mortgages and a burst of liquidity thanks to ‘cheap money.’

A study done by the International Monetary Fund looked at housing busts in recent modern economic history and thier long-term effects on national economies. Analysing house prices in 14 countries during 1970-2001, it identified 20 examples of

One comment

  1. This topic isn’t my area of expertise. Far from it. I need to know more about these things, especially in view of the fact that my wife and I do own a home in East Nashville – a house we bought in 2002. Will that investment pay off in a year or two when we decide to buy a house in our new location? I don’t know.

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