Update, May 14, 2003
On the whole, the property market in the
Pioneer Valley seems to be plateauing so far this spring. Inventory has
been a bit lower than last year. That and the low interest rates have kept
prices up, despite increasing distress on the job front. With more
information technology jobs being exported to India and elsewhere, many
software programmers in the Valley are feeling the pinch. Also, the
cutbacks at UMass and in local school and government budgets will affect
the general employment picture here in the Valley. All this creates a drag
on the upward movement of house prices. Buyers still believe that real
estate prices will continue to rise, so prices are still trying to
rise, much as they are trying to rise in the stock market, despite the
downward pull of fundamentals. Asset price inflation (i.e., inflation of
stock prices and house prices far beyond their underlying fundamentals) is
always a game of expectations.
I don't have a crystal ball, but my read
of the situation is as follows: the US dollar will continue to decline. If
foreigners begin to dump their dollar assets, this could force the markets
to raise interest rates. When that happens, the pool of buyers will dry up
and house prices will begin to decline slowly. Once such a trend starts it
will be self-reinforcing and could easily continue for 5 years or more.
This is the scenario we sketched out in "Why
Home Prices Are Going through the Roof." If expectations
turn gloomy, then they will work to drive property prices down.
So long as interest rates are kept low,
however, house prices will probably just move sideways for the most part.
The Fed will do all in its power to keep rates low, but if the dollar goes
into a downward spiral, Greenspan & Co. may not be able to fend off
the inevitable.
We are sailing into uncharted waters
economically. Globalization has created overcapacity, which reduces profit
margins and creates a "race to the bottom" that undermines
quality of life for everyone. In the next decade, we are probably going to
see an increasing export of service jobs (finance, information technology,
consumer service centers) to India, the Philippines and elsewhere, much as
our manufacturing jobs were exported in the 1980s and 90s. Such is the
implacable logic of our neoliberal economic system. At some point, it will
dawn on even the most complacent souls that there has got to be a better
way!
The best outcome here is probably a
change from an export-led growth and globalization, to development that is
centered more on local economies and the welfare and quality of life of
the community or bioregion. It's unlikely that this will happen without a
collapse of the current global financial system, of which our real estate
debt markets are an integral part.
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