Saturday, September 8, 2007

Upside of the Downside

All signs point to a moderate to severe "correction" across the board, with housing as the latest bubble to pop. As our purported wealth evaporates we will undergo a collective belt-tightening with the accompanying slowdown in spending and consumption. Given how much recent economic activity - what our economists regard as signs of economic health - has been the result of debt and leverage, the deflation of the main driver of this activity - housing - will reverberate widely and painfully. One can already discern the self-reinforcing trajectory of the decline - one that reverses the self-reinforcing upward climb of the past decade - in which foreclosures will depress housing prices and in which depressed prices will in turn induce foreclosures, etc. etc. More broadly, one makes out with increasing clarity how the reduction in disposable income will reduce consumption, which will in turn lead to loss of jobs (Countrywide Mortgage's 12,000 are only the beginning), which in turn will lead to further reduction in income... etcetera, etcetera, etcetera. Where we will finally land is hard to predict, but it may very well not be particularly soft.

It's beginning to sink in that the housing deflation is here to stay. Even with Fed intervention and efforts by Bush & Co. to lessen the pain felt by subprime "home"owners, it's unlikely that we're going to see a return to the days of the bubble anytime soon. There simply won't be the same level of speculative buying after all the "playas" have felt the burn - no flippers and no mortgage gimmicks, for starters. The example of the high-tech bubble is instructive: while we largely think that we came out of the popping of the Nasdaq in 2000 fairly well, the Nasdaq to this day still remains about 50% lower than its all time closing high of 5132 (on Friday it closed at 2565). If the popping of the housing bubble turns out to be in any way comparable, a whole lot of people are going to be sitting on some hefty levels of negative equity - and highly leveraged negative equity at that (if housing were stocks, many could be expecting margin calls any day now...).

Across the board people are pretty downbeat about this possibility. Like people watching their stock portfolios, they still crave to value their property at peak price, and not at the price that Mr. Market is telling them their McMansions are worth. We have neighbors down the street who have had their house on the market for two years, having put it for sale at the high end of "comps" during the housing boom and having refused to lower it since that time. We regard their "For Sale" sign as a particularly dreadful but permanent piece of lawn decoration.

There is a real upside to the downside, however. A generation of people came to regard their houses as investments, not as homes. They moved from place to place, always looking to make the next killing and move on to the next "investment" opportunity. It was hard to avoid this mentality when every cocktail party conversation revolved around the hourly jump in housing prices, gossiped over with the same level of excitement that we used to talk about how far we got in the backseat with, well, "you know who."

Our negative equity is going to force a lot more people to stay put. This fact may have a profoundly salutary effect on the way we view our domiciles, our neighborhoods and our place in the world. We may begin to regard our houses as homes - all the claptrap from the real estate industry about "home ownership" notwithstanding - giving to our children a sense of belonging and permanence that is often lacking in our highly mobile society. We may begin to renovate homes - when we do so at all - more with a view to increasing their intrinsic worth as a place to be lived in, rather solely than their superficial resale value. With a longer-term view of home ownership, we can begin to make investments that will pay back over longer periods of time, either in the form of more expensive but longer lasting materials or upgrades whose return of investment will only pay back after a decade or more (such as solar heating or solar electricity). Along with the return of some reality to the word "home" we might also see a return of real meaning to the word "investment," an activity that involves a long-term commitment to long term returns, at once requiring patience and care. (If you read the newspaper, you will see the word "investor" used to describe the behavior of speculators, or hit-and-run profit hounds). We can begin making other sorts of investments on the presumption that we will be staying for a long time - caring for our neighborhoods, forming lasting bonds with our neighbors, building communities of permanence and human value. We might be more inclined to resist rapacious economic activity that seeks only to extract maximum profit from our communities without intention of giving back. As we exit our transient and temporary flirtation with a liberated "lifestyle" without permanence and memory, we will - by necessity - rediscover certain virtues that come with a confrontation with limits. These will be painful, without doubt - and most painful for the poorest among us, though we can hope the high finance boys get whacked pretty hard - but from the ashes of our decades-long individualistic fantasy of "post-materialism" we can begin anew to connect with a real material world that benefits from human sustenance, and from which in turn we might be sustained.

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