Serving the Pioneer Valley of Western Massachusetts

  The Debt Crisis and Real Estate

                                                                                        by DAVE HOPKINS

In a nutshell, NOW IS NOT THE TIME TO BUY REAL ESTATE. Real estate prices will fall for at least a few more years.

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My earlier, 2003 article ("Why Home Prices Are Going through the Roof: A Brief Guide to the 'New Economy'") was, no false modesty here, right on in its expectation that the real estate hyperinflation would end in tears. I shouldn't blow my own horn too much though, for I depended entirely on such far-sighted analysts as Henry C.K. Liu and Steve Keen. What do these men have to say about the current crisis? Surely, we should turn to them and not the pundits now filling the airways, who had it dead wrong the first time around!

Steve Keen, an Australian economist who teaches at a university there, predicts now that the current pump-priming with liquidity and the bank bailouts will not address the underlying crisis, and governments will have to change tack dramatically in a couple of years. The real solution is to either cancel debt (granted, a last resort when all else has failed, but it created economic renewal again and again in the ancient Near East when the entire economy was crushed by debt) or to increase workers' wages (and their ability to service their loans) by reversing the very policies that have depressed wages since the Reagan years: (1) Reduce outsourcing of jobs; (2) restrict immigration of cheap labor in a nonbiased way; and (3) stop suppressing union activity and collective bargaining. For it is only by building up demand (purchasing power, roughly) without debt that we can come out of this deflationary downward spiral.

Liu is more or less in line with this prognosis. The current efforts of the Fed and the Treasury are simply efforts to keep asset prices (property values and the equity markets) pumped up. They do not realize that this old game is played out; they are pushing on a string; or in Mike Whitney's words, are "like a man pumping air into a punctured tire, pushing up and down furiously while the air hisses out the other side." They're trying to reinflate asset prices and the stock market, but the puncture here is the lack of income, for wages have been suppressed for decades by global labor arbitrage (outsourcing etc.).

The "high finance" of the last few decades was built on debt and depended on the little people continuing to make their monthly payments. It was a huge pyramid scheme on the backs of working people. The image comes to mind of a immensely obese man riding on a small donkey with wobbly legs. Well, the donkey has collapsed now, and it has brought the financial system down with it! Let's face it: The global economy is going nowhere without its donkey. That is the lesson that Bernanke and even Obama's economic team will have to learn the hard way.

There are no easy fixes because the system is broken. Look at the Third World, the planet of slums that neoliberal policies and our megabanks have created. These countries have been devastated by "financial weapons of mass destruction" (debt that mortgaged or even stripmined the lives and resources of their people), and may offer a glimpse into parts of our own near future.

Turning this huge ship around will not happen in a few years or even a decade. The whole system of global labor arbitrage, resource wars, a global financial system based on debt that overwhelms and crushes countries and households and communities---it is all a sick system that hollows out our world, empties it of meaning.

Obama's New Deal-like infrastructure projects and job creation will help, but so long as the rest of the system is same-old, same-old, they will never touch the root of the economic and cultural crisis besetting us today. The green technology projects sound good at first, but they tend to centralize technologies that are naturally decentralized and so empower corporations rather than households and communities. Also, these industries, with their demand for rare minerals and metals such as lithium for electric car batteries or coltan (in the Congo) for all sorts of electronic screens, are complicit in the resource wars and exploitation of "undeveloped" countries that have such resources. Greening the current megamachine seems more than a bit preposterous.

So, although one never knows what the Fed or the Treasury might do to zap the zombie economy back to life for another decade of marauding the living world, I expect real estate values to fall for a few years at the very least. It will be more like a slow-motion train wreck than a dramatic collapse. Demand continues to be destroyed. The new unemployment figures for November grab one by the throat, that's how portentous they are. That and credit card companies cutting back or rescinding credit lines, will create considerable suffering, for credit cards are a fall-back for most in the current system. All of this destroys demand, and without demand we can expect the same downward deflationary spiral to continue, including falling house prices.

When I counsel clients in real estate these days, indeed for the past few years, I talk more about hunkering down, not taking on too much debt, looking at land in a different way: Can you raise your own food? What's the soil and its drainage like? Potential pasture for animals for food, fiber or milk? Fruit or nut trees? Can you sustainably harvest firewood here for fuel? Is there a nice wide solar window/exposure, for passive solar, which is the cheapest and most low-tech way to keep a house warm? Yeah, it sounds like a return to the Middle Ages, if not the Neolithic period. But if we learn anything from this debt crisis, we will learn that most of the wealth and prosperity in our currently tottering system left gaping holes elsewhere: holes of poverty and blight, holes of destroyed community. It was never sustainable.

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