Housing Starts UP with Market Glut?

Three years ago, when this derivative housing mess caught my attention, the reason I started looking into it was that the basic facts didn’t make any sense. Housing prices had been going up at a rate of as much as 20% in one month.

Coming from Wall Street with an M.B.A. and having studied, written about and commented on economics most of my adult life, I looked for obvious answers. Inflation? Nope, not that. Population increase? Nope not that. Migration patterns? A little but not nearly enough to account for the increases quoted by developers and secondary sellers.

So I asked sales people in real estate how they accounted for it. They told me that in Arizona it was being fueled by people selling their homes in California for $2 million and buying the same thing here in Arizona for less than half that amount. OK that would mean some migratory pattern. Are you from California?, I asked many people. Some. OK. Assume that my little non-scientific survey turned out wrong, and we start with the hypothesis of high prices in California fueling the Arizona boom.

More questions. How does that account for other parts of the country. BY the way, who is buying the homes in California? The story I got was that Vietnamese families were moving into expensive neighborhoods and 20 people comprising multiple generations (Gran Torino with Clint Eastwood? Good movie, but hardly the rule) could afford the $2 million price tag.

So after going down about a dozen rabbit holes my suspicions were raised about Wall Street’s involvement. You see they are the only ones who come up with other people’s money, selling them on a great investment opportunity because that is the only way Wall Street makes money.

Ok the rest is history. Prices went up simply because Wall Street was using a power pump forcing money into the system that the system could not absorb.

So like a balloon, it expanded, especially when the number of housing units sold was going down. The only way they could keep pushing out more money was by inflating the appraisals on the property. As the number of balloons declined relative to the supply of “air” (money) they had to blow the balloons up further and further even though everyone knew they would eventually pop. But they had that covered too, as everyone now knows because they made money on the way down through credit default swaps, federal bailouts etc.

Which brings me to my point. All current indications from the economists and experts who study this sort of thing are that in 20 years, (that is in the year 2030) there may be as many as 30 million unoccupied dwellings in the United States, even taking all the best predictions for population growth, migration etc. And you don’t need to employ an expert to see that there are unoccupied houses in your neighborhood and that there are even unoccupied neighborhoods, thanks to the foreclosure mess. So the inescapable conclusion is that we have built too many homes, shopping centers, office buildings etc. The demand is not there and it isn’t going to be there for decades.

So here is my question: Why are houses still being built? Who is financing them and who is buying them? Why are there government programs providing new home building incentives when what we need are new rail systems, new electrical grid, new high-speed internet, and new technology retrofitting homes that waste energy? Is something funny going on, AGAIN?

Tags: ARIZONA, CALIFORNIA, credit default swaps, derivative housing mess, federal bailouts, housing prices, inflating the appraisals, unoccupied dwellings, unoccupied neighborhoods, Wall Street
Posted in bubble, Corruption, Eviction, securities fraud |