Friday, February 25, 2011

You Can Afford Both a McMansion and iPad

Housing is one of the most critical parts of the overall economy as a whole (well that’s stating the bloody obvious). When things were bubbling along in great fashion back in the g.o.d. (good old days) at the height of the housing frenzy in 2005, the United States started 1,715,800 homes, see NAHD stats . Between 2002 and 2007, we started over 11.2 million housing units, 1.4 million per year. In 2009 and 2010 we averaged 458,000 residential units, almost one million less than the running average.

These millions of homes meant millions of refrigerators, air conditioners, garage door openers, and toasters. Millions of yards of carpeting, millions of gallons of paint, and miles of wiring were built into these homes; roads and services were needed for support. Sure, some of the goods came from China but a lot came from the United States and our partners to the north and south. In the United States it is very easy to see where the underlying malaise and depression comes from when there is this hit to the economy. But then again if we acted like this in our own lives by buying and building more than we need, we would have, and now, do have the same problem.

This is going to be an economic disaster for a long time. I have noted in past blogs about the housing overhang (excess existing new housing (unsold) that exceeds demand) and its impact on the market. Outside of some very regional markets (in fact these are almost at neighborhood levels), housing demand for new housing is dead. If I see one more news article stating: Housing Continues to Drag on the Economy, I’ll scream (OR START TYPING IN ALL CAPS). Yes, so? There is not one economist or human (they are separate species), that can predict when this will turn. Depending on your level of paranoia or conspiratorial beliefs, we are either being manipulated by the oil companies, unions, school teachers, March Madness, or 3 retired bankers from Goldman-Sachs that meet once a week at a small coffee shop in the east end of Long Island before playing Shinnecock (the last one may be true).

Do you really want to become depressed (or is the politically correct term now “recessed”), read Gary Shilling in Forbes this week. Schilling sees a continued decline in house prices of 20% (he also believes that the end of the world is only a few weeks away); this is on top of the total collapse of the housing market we have seen to date. Some articles guess that 11% of the homes in the US are empty, these are unsold, foreclosed, or abandoned, this translates into 18.4 million units.

An iPad is a better investment than a house.

Ludwig von Mises, my economic guru (and yes he was a different species), said quite simply “the market is supreme.” That pesky little bit of human action that we rely on for everything: buy-sell, barter, trade, homes, cars, iPads, are all driven by an agreement between a seller and a buyer. Supply and demand, want, fear, everything comes back to the simple: need and offer. This is the current state of housing, not just here but across Western Europe as well. Governments pumped excess capital into the market (stimulus), subverting the buy-sell relationship (the buyer had “more” cash thus the seller raises his price). At some point it would and did collapse. It will take us years to rebalance this buy-sell arrangement. The government can’t help make it better, but they can make it worse.

The costs of things are rising, commodities prices are rising, the market (the universal “us”) is driving the world to reprice the buy-sell arrangement. We all want sweetness and light in our lives, sunny days and an iPad (this is true but I’m waiting for the next generation – but then again aren’t we all).

The one bright spot, believe it or not, is housing. Everything else will go up in price but the overhang will keep home prices low. Interest rates are lowering again, and if home prices do drop as predicted, the McMansion may become as cheap as a Double-Whopper with fries and a shake.

Stay tuned . . . .

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