When the economy becomes a financial circus based on debt fueled acrobatics: Lessons from the Great Depression Part 34. Tracking housing values from 1940 to 2011.
“Facts do not cease to exist because they are ignored.” -Aldous Huxley. The global economy is undergoing a metamorphosis of historical proportions. For many decades we have built a system highly leveraged on debt and the real estate bubble has become a worldwide sensation. We do live in interesting times and the following decade will prove to be a dramatic change on the current financial order. For every decade since 1940 household income has gone up in tandem with housing prices. This makes logical sense since inflation eats away the purchasing power of money and you would expect goods would adjust to new income levels. The housing bubble of the last decade superseded this trend where incomes actually fell yet home prices went into a mania. Not only did home prices inflate but also the cost of a college education, automobiles, and a variety of financed items entered unsupportable price ranges only because of their access to easy money. As the 1920s taught us, unbridled greed and gambling does provide enough fodder to shut down the global system. The fact that home prices now enter new post-bubble lows even after trillions of dollars in banking bailouts demonstrates the futility and graft of the current financial system.
This is part 34 in our Lessons from the Great Depression series:
When numbers cease to matter
You can dip a rotten apple in caramel but once the caramel is eaten you will still have the taste of a bitter fruit. That is an apt description of the bailouts given to the banking sector. The caramel has fallen off into the coffers of the financial system and now that the trillions of dollars are stripped off, we are still left with the glaring reality that home prices simply do not reflect underlying income trends in our country. The last time housing values fell on a nationwide basis was during the Great Depression. It should cause you to pause that the crash in values today is more dramatic than during the darkest time in our nation’s financial history. I wanted to look at home values after the Great Depression since we have more accessible data from 1940 on:
*Census Owner occupied data (From 2009 ACS), Data from NAR and CAR for 2011
From 1940 to 2000 home values seemed to move up in significant ways but so did household income. From 1940 to 1950 the median home price more than doubled. This happened yet again from 1970 to 1980. From 1990 to 2000 home prices nationwide went up by 51 percent. The more important factor to remember is that household incomes were going up during this time as well. That is something that cannot be said for data from 2000 to 2010.
Take a high priced state of California who underwent two housing bubbles in the last two decades. According to Census data the median price of a California home went through these motions:
2009: $479,200 (data from the 2009 ACS)
2011: $249,000 (current May 2011 data, DataQuick)
After all the tumultuous ups and downs in California home prices are close to their 1990 level. The caveat of course is that California was in a bubble in 1990 similar to the price point in 2009. Yet in all of this information we need to remember that incomes have gone stagnant. The only reason home prices went into the mania that they did was access to easy financing brought on by the Wall Street machinery and the government loan apparatus. The 1920s setup a nation with speculators and snake oil salesmen conning the American public into a false sense of prosperity (by the way even at the peak in 1929 60 percent of Americans were still living at or below the poverty line). And of course the Great Depression quickly followed once the facts were acknowledged:
This week we found out that foreclosure filings came in at a low figure not because things are improving, but because banks continue to manipulate the system and continually ignore the reality of the market. The reality is that Americans are only in a position to afford cheaper homes. Of course the banks would love nothing more for one more round of musical chairs. They would love the tune to go on long enough to unload their inventory, wipe their hands off, and let the market have its way with the public. Home prices can only be supported by a system that provides adequate income to its workers. How else will mortgages be serviced? Has this side of the equation been erased?
The investment banks on Wall Street have forgotten what it is to work for an honest living so to them, there is nothing unusual about derivatives, CDOs, speculating on failing countries, or home equity loans and going into massive debt to finance spending. This is the way they make their existence. They are the modern day P.T. Barnum held up on an altar even though the typical American has seen their financial situation deteriorate significantly over the last decade. We would have to go back to the Great Depression to witness such destruction in financial wealth.
The home equity carnival machine
The second mortgage craze always struck me as odd. Why would anyone want to borrow against the equity built up in their home? It wasn’t like the money came without strings attached because it was a loan that had to be repaid but also increased the overall debt on the home. From 2004 to 2006 homeowners took out an astounding $2.69 trillion from their homes. This money was used to finance renovations, vacations, and a tremendous amount of conspicuous consumption. By the way, did I mention that incomes did not go up in the last decade?
This is the startling revelation of our current crisis that probably flies in the face of the Great Depression. As incomes collapsed so did household consumption with home prices right behind it. We were entering a less dramatic shift in the last few decades but each time the Federal Reserve stunted these corrections with easy money and allowed the party to go on (at least long enough for banks to square away their finances by taxpayer bailouts). Every little lie eventually led to the biggest lie of all which ignited the biggest housing bubble ever known to humankind. Home prices doubled and tripled in many areas at a time when incomes were falling. The circus became mainstream and everyone wanted a chance to jump on the housing trapeze.
The tide recedes and incomes go with it
As the tide is receding we realize that much of the housing market over the last decade has been one giant farce built up only by financial hucksters trying to sell the American dream and extracting every ounce of money along the process. Household income, the most vital and key component of the housing equation has moved lower over the last decade:
Do you ever wonder why there is never a full analysis of income on the popular press or all those cable housing shows? You would think this is something that would be mentioned since it is the most vital component. It should be no surprise then that home prices are now entering a lost decade with little fanfare in the press. Home prices are merely reflecting weaker incomes. I’ve seen the argument made countless times that “this time things are different because interest rates are so low.” Interest rates are the elixir of the huckster financial graft expert. Keep in mind that the interest rates you see today are juiced and artificially built up by trillions of dollars of Federal Reserve financial wizardry. These rates are also low because the Fed in conjunction with Wall Street investment banks and our government have allowed banks to suspend mark-to-market accounting and flat out create a parallel financial universe where typical laws of economics do not apply. Of course when you have a financial system like this you might as well have King Henry as your central banker making up laws that suit the interests of the banking system. How well is that working out for the over 6 million homes in foreclosure or distress? How well is that working out for the nearly one-third of mortgaged homeowners underwater? How well is that working for the crowd that is still unemployed?
What we have here is a throwback to the days of the 1920s when we had Charles Mitchell running National City Bank and other salesman titans of Wall Street making money on massive speculation. It is amazing how the too big to fail banks define capitalism through their actions. They want the free market when they can rip off the poor with hidden bank charges or convoluted credit card statements. Hey, if you don’t like those fees feel free to switch banks, they will tell the public. In the same breath they want taxpayer handouts, the same folks they are ripping off, to pay for their grandiose speculation that made many of them wildly rich. Even if you look at the shadow inventory this is the absolute antithesis to capitalism. The too big to fail banks have flat out suspended accounting rules and regulations to simply benefit their own greed and corruption. The market is demanding lower priced homes to go with lower household incomes. This would decrease the financial burden on the American family. Yet banks do not want this to happen so they get their connected politicians to suspend standard accounting rules, not from the days of “talkies” and speakeasies, but from the recent Enron fiasco. These were rules to protect the ordinary investor from lopsided insider driven systems.
Japan followed a similar path by bailing out their banking system and little demand for actual reform came from the people. So here they are experiencing two lost decades. What happens when banks do not acknowledge the facts is an odd form of financial kabuki theatre. We now hear of multiple cases of blocks of REOs being sold to select investors without properties being issued to market. In some cases properties are sold off the MLS to individuals who then quickly sell them for a fast profit. How can we tell? The same people that doctored financial statements and lied about practically everything are here running the system still. The circus goes on and American households are facing lower incomes and home prices still continue to fall even in the face of all the bailouts. Those putting on the financial circus still seem to have enough to put on a spectacle and try to obscure folks from paying attention to what is really going on.