Market Report: November 2008

Please note that this article was published on November 1st before the election in the Presidio Sentinel and it has not been edited to reflect the election result. I remain hopeful that housing has found the bottom. I am confident the interim ruling troika of Mr. Obama, Mr. Paulson and Mr. Bernanke will support housing prices. Their approach will not be ideological but pragmatic; their efforts should stabilize the market and provide a base for the next round of appreciation in 2011.

The End of the American Century

It is entirely fitting that Yankee Stadium closed on the same day foreign investors were busy picking over the carcass of a legendary American financial icon. The era of the storied venue in the Bronx neatly shadowed America's rise and fall as the world's dominant world economic power. Those responsible for this humiliation, exiled in the Hamptons, were modern day alchemists who rubbed paper together to create an endless bounty of Ferraris and Manolo Blahniks. The events of this fall will affect real estate over the next decade and it is important in that we arrived here by design and not by accident.

Twenty-eight years ago Americans eagerly (re) embraced the culture of the Gilded Age. The existing regulatory and moral authority of government, beginning with the Progressives at the turn of the century, was seen as the bane of progress and prosperity. Greed and self-interest became a national lifestyle, enabled by Washington and glorified in popular culture. A new class of financiers, aided by globalization and microchips, delivered prosperity. Unfortunately for most Americans, this was a Faustian bargain and now the devil is demanding his due.

Americans are looking for solutions not found in the Administration's ideological playbook. New Deal ideas, such as stronger governmental oversight and shared sacrifice, are suddenly in vogue. Programs from the Depression are finding their way into various rescue bills. At first President Roosevelt instituted the philosophy that citizens must be protected by governments and now the worm has turned his way. For evidence of this look at Mr. Greenspan's painful mea culpa before Congressman Waxman's committee last month. He all but waved the white flag on behalf of the now marginalized Reagan Revolution.

In addition, the European model of political comity and social leveling is gaining traction with younger voters who will drive the political debate in the next decade. This demographic will expect their government to actively serve the citizenry and increase the common weal, even at the expense of rugged individualism. This change was already in the wind with the 15 to 25-year old set; the disaster created by the old order has jump-started the counter-revolution.

First there will be far greater oversight and regulation of corporate America, and second there will be Federal tax and spending changes to reduce governmental borrowing. The new political consensus will not accept, nor can it afford over the long run, deficits financed by borrowing recycled American dollars from abroad. The national debt has grown from one trillion in 1981 to ten trillion today. There will be fewer after-tax dollars rolling around.

These changes will have a profound effect on housing prices, rents, and construction. Home ownership will become less accessible once the current inventory of distressed sales and new homes is absorbed and prices stabilize. The lack of cheap land, coupled with rising energy and resource costs, will limit traditional new residential development. The future and unknown cost of restructuring existing problem mortgages will tax the resources of the lending community for several years. Rates may be reasonable, but there will be some form of credit rationing driven by a combination of regulation and wary bankers.

Real Estate will cease to be our local sport. Utility will trump commodity. It will be more difficult than in the recent past to join the homeowner class. There will be fewer home sales and fewer real estate agents. Prices, assisted by inflation, will rise moderately over the decade as the demographic of home ownership starts to become more European and less Wild West. This calming of real estate will mean less market drama and more price stability.

Voluntarily staying on the sidelines will be a losing play. The Federal Reserve Board, as well as the two major political parties, cannot allow the current deflationary cycle to continue much further. Wholesale deflation of hard assets, as occurred during the early part of the great depression, carries unacceptable social and political costs. Housing has already deflated 30 to 40 percent and we are already seeing rising unemployment and business failures resulting from shrinking home equities. If unemployment reaches nine or ten percent, the Fed will have little choice but to provide more liquidity even if that means tempting the inflation gods.

There is a direct line from September 11th to that foreclosure down the street. The financial effects of the post 9/11-driven credit binge will be with us long after new spires have risen from that hallowed site. The hangover from the excesses of the past twenty-eight years and the paradigm shift in voter demographics suggest that we will redefine the national consensus on the relationship between corporate and political America. The coming period of stability will make housing less speculative and therefore offer up more pricing stability. As always, those with good property will end up as winners. Tenants will fare poorly as rents move up faster than home prices, but they will not be hit as hard as owners of vacation homes.

Click on image to download full size PDF (272 KB)

Click here to see Jim's past Market Reports.

> Send me complementary, custom MLS listings
> Contact Jim Scott for more information or with comments at jimscott@sqre.com