[A-List] Riding the Real-Estate Tsunami

["Sabri Oncu" <soncu@xxxxxxxxxxx>]

Tomgram: Mike Davis on Riding the Real-Estate Tsunami

This post can be found at http://www.tomdispatch.com/index.mhtml?pid=2329

A new Mike Davis piece at Tomdispatch is, to my mind, always cause for
rejoicing. If you live in the San Francisco Bay Area -- where I've been
hunkering down for the last several weeks -- or New York City, where I live,
or at various other familiar urban locations (or their suburbs), you already
know that buying an apartment, or a house, has become a kind of living
nightmare beyond the means of most people. Take Washington, where, according
to the estimates of real-estate agents and builders (as reported in the
Washington Post), prices have risen by about 15% since the beginning of this
year -- add that to the 21% rise last year and the 89% rise over the last
five years, and you may have the American equivalent of Tulipmania. (In 17th
century Holland, the craze for tulip bulbs reached such proportions that
"the price of one special, rare type of tulip bulb called Semper Augustus
was 1000 guilders in 1623, 1200 guilders in 1624, 2000 guilders in 1625, and
5500 guilders in 1637" -- this at a time when average annual income was 150
guilders. And then, of course, the tulip bubble burst.) As Washington Post
reporter Daniela Deane puts it of the present housing mania in the
Washington area, "It's another insane spring in the local real estate
market. As the prime season for buying and selling unfolds, very few homes
are for sale, prices are climbing rapidly and desperate would-be buyers are
bidding feverishly against each other. But now the question comes up more
and more: How long can this last?" 

Needless to say, at least some mainline economists are starting to get
nervous about whether the housing boom isn't a housing bubble. Mike Davis,
on the other hand, asks whether it isn't a housing bomb set to explode right
under the Bush administration. As he does on just about any subject he
touches, Davis takes our real-estate boom and makes a new kind of news out
of it, suggesting that the Bush administration is riding this particular
economic tsunami to an uncertain -- but possibly unenviable -- end. 

After I return to New York and once again have the time to read the news
more fully, I hope to turn to the question of how the Bush administration
might indeed implode. In the meantime, in the week after at least one false
bottom dropped out of the stock market, read Mike Davis and think about the
economic realities of imperial America. Tom 


Riotous Real Estate
By Mike Davis 

Last February the sirens howled in Hollywood as the LAPD rushed
reinforcements to the 5600 block of La Mirada Avenue. While a police captain
barked orders through a bullhorn, an angry crowd of 3000 people shouted back
expletives. A passerby might have mistaken the confrontation for a major
movie shoot, or perhaps the beginning of the next great L.A. riot. 

In fact, as LAPD Captain Michael Downing later told the press: "You had some
very desperate people who had a mob mentality. It was as if people were
trying to get the last piece of bread." 

The bread-riot allusion was apt, although the crowd was in fact clamoring
for the last crumbs of affordable housing in a city where rents and
mortgages have been soaring through the stratosphere. At stake were 56
unfinished apartments being built by a non-profit agency. The developers had
expected a turnout of, at most, several hundred. When thousands of desperate
applicants showed up instead, the scene quickly turned ugly and the police
intervened. 

A few weekends after this tense confrontation in Hollywood, another anxious
mob -- this time composed of more affluent home-seekers -- queued up for
hours for an opportunity to make outrageous bids on a single, run-down house
with a cracked foundation in a nearby suburb renowned for its good schools.
"The teeming crowd," wrote Los Angeles Times columnist Steve Lopez, "was no
surprise given the latest evidence that California's public schools are
dropout factories." 

Los Angeles' under-funded, overcrowded, and violent schools, according to a
recent report by Harvard researchers, currently fail to graduate the
majority of their Black and Latino students, as well as one-third of whites.
Parents, as a result, are willing to make extraordinary sacrifices to move
their children to suburbs with functioning public education. This gives the
old adage that "location is everything" in real estate a new twist: Housing
in Southern California is universally advertised and graded by the prestige
of local school districts. 

The Southern California housing crisis, of course, has a sunnier side as
well. In the last five years median home values have increased 118 per cent
in Los Angeles and an extraordinary 137 per cent in neighboring San Diego.
Homes, as a result, have become private ATM machines, providing their owners
with magical, unearned cash flows for purchasing new sports utility
vehicles, making down payments on vacation homes, and financing increasingly
expensive college educations for their kids. Second mortgages and home
refinancings, according to a Wharton Business School survey, have generated
an astounding $1.6 trillion in additional consumption since 2000. 

The great American housing bubble, like its obese counterparts in the UK,
Ireland, the Netherlands, Spain, and Australia, is a classical zero-sum
game. Without generating an atom of new wealth, land inflation ruthlessly
redistributes wealth from asset-seekers to asset-holders, reinforcing
divisions within as well as between social classes. A young schoolteacher in
San Diego who rents an apartment, for example, now faces an annual housing
cost ($24,000 for a two-bedroom in a central area) equivalent to two-thirds
of her income. Conversely, an older school bus-driver who owns a modest home
in the same neighborhood may have "earned" almost as much from housing
inflation as from his unionized job. 

The current housing bubble is the bastard offspring of the stock-market
bubble of the mid-1990s. Housing prices, especially on the West Coast and in
the East's Bos-Wash corridor, began to rocket in the second half of 1995 as
dot-com profits were ploughed into real estate. The boom has been sustained
by sensationally low mortgage rates, thanks principally to the willingness
of China to buy vast amounts of U.S. Treasury bonds despite their low or
negative yields. Beijing has been willing to subsidize American mortgage
borrowers as the price for keeping the door open to Chinese exports. 

Similarly, the hottest home markets -- Southern California, Las Vegas, New
York, Miami, and Washington, D.C. -- have attracted voracious ant columns of
pure speculators, buying and selling homes in the gamble that prices will
continue to rise. The most successful speculator, of course, has been George
W. Bush. Rising home values have propped up a stagnant economy and blunted
criticisms of otherwise disastrous economic policies. 

The Democrats for their part have failed to address seriously the crisis of
millions of families now locked out of home-ownership. In a bubble city like
San Diego, for instance, less than 15% of the population earns enough to
finance the cost of a median-value new home. 

Accordingly, if "values" were the basis for the Bush victory last November,
they were property values not moral principles or religious prejudices. In
the face of the perverse housing bubble, the Kerry campaign, as with
healthcare costs and the export of jobs, was simply running on empty. It
offered no compelling alternative to the status quo. But the Republicans
have more serious things to worry about than Democrats. As the real-estate
bubble reaches its peak, George Bush may discover that he has been surfing a
tsunami and that a towering cliff looms ahead. 

The bubble has already burst in San Francisco, and the April 11th issue of
Business Week headlined fears that a general deflation - perhaps of
international magnitude - is nigh. What will life be like in the United
States (or Britain or Ireland) after the home-equity ATM shuts down? 

The business press, as always, reassures passengers that they are headed for
a "soft landing," a slowdown rather than a crash, but even a mild jolt may
be sufficient to end the current anemic recovery and throw all the
dollar-pegged economies into recession. More ominously, some eminently
respectable Wall Street economists, like Stephen Roach of Morgan Stanley,
have been warning of a dangerous negative-feedback loop between the
foreign-subsidized housing bubble and the huge U.S. trade and budget
deficits. ("The funding of America," he has written, "is an accident waiting
to happen.") 

At the end of the day, American military hegemony is no longer underwritten
by an equivalent global economic supremacy. The housing bubble, like the
dot-com boom before it, has temporarily masked a mess of economic
contradictions. As a result, the second term of George W. Bush may hold some
first-class Shakespearian surprises. 

Mike Davis is the author of Dead Cities and the forthcoming Monster at the
Door: the Global Threat of Avian Influenza (New Press 2005). 

Copyright 2005 Mike Davis