(This is Part 4 in a series. Go back to Part 3.)
This morning I happened to see an ad for an SUV in the paper. It featured zero% financing, zero down payment and zero first month's payment. The average "incentive" in an auto sale is now pushing $3000. Hmm. Does this smack of a certain desperation in selling vehicles?
We live in a time when you can get a 7-year loan for your vehicle. We live in an era when banks are now financing —get this—an average of 100.9% of new cars and trucks. And 40% of new-car buyers are "upside-down" when they come in—that is, they owe more on their trade-in vehicle than the vehicle is worth. Debt, anyone?
Or how about houses? Recent innovations in the housing market include no-down-payment mortgages, interest-only
mortgages, and mortgages for greater than 100% of the cost of the house.
As I write this, people in Washington, D.C. are camping out to be first in line for condos still being built. Condo prices in New York City were up 40% last year. "All signs point to buy; everybody is in love with real estate," says a real estate broker.
Meanwhile, houses in California are up 100% in six years, 44% in the last two. California condos have surged 116% in six years. The median home price rose $19,390 in 1999, $25,880 in 2000, $37,940 in 2001, $57,510 in 2002 and $65,680 in 2003. Acceleration, anyone?
Mortgages? U.S. mortgage credit grew an average of $276 billion per year in the 1990's. And 2003? Last year mortgage credit surged by 1 trillion dollars. Home equity as a percentage of home price is now the lowest in history.
U.S. Household real estate has risen in three years from 118% of GDP to 147% of GDP, the highest in history. Total U.S. Mortgage Debt has risen 50% in just 3 years.
And these levitations are not just a U.S. phenomenon. House prices have been surging at double-digit rates in Britain (17.1% last year), Australia (17.3%), Spain, Canada, Italy, France, etc.
Finally, the key ratio of housing prices to income has reached all-time highs in the United States, Australia, Britain, Spain, the Netherlands, Ireland, and is hovering near all-time highs in many other countries.
To make matters even more interesting, cash is being pulled out of houses at a prodigious rate through mortgage refis. U.S. homeowners extracted half a trillion dollars from their homes last year, which is over 25% of the total deposits in banks. Essentially, real estate is being used as a gigantic ATM machine.
Real blue-collar wages have been declining for 30 years now. White-collar salaries are not keeping pace with inflation. Prodigious tax cuts are targeted mainly to the rich. Where does this leave the consumer?
The strapped consumer—whose ratio of indebtedness to income is at an all-time historic high—is now using home equity extraction as the main source of purchasing power in the economy. This debt-based liquidity is then being funneled (85% last year) into further asset purchases in a self-reinforcing spiral.
This seems like a fairyland, global society's discovery of a quick and easy way to so-called wealth creation through debt-fueled asset bubbles. No longer is savings from productive effort and investment in productive capacity required to build a society's wealth.
It would be interesting if this process could continue forever. But it is the very nature of credit bubbles that ever-greater credit excess is needed to sustain them, and this ever-increasing excess in turn fuels greater and greater distortions in the economy—from debt burdens, imprudent investments and mal-directed resources.
Eventually, these distortions bring about the inevitable collapse of the bubble. And the longer the excesses of the bubble are allowed to continue, the greater and more catastrophic is the ultimate bust.
In the developed countries of the world, real estate ($40 trillion) is now even more important as an asset class than equities ($23 trillion). Thus the coming collapse of the housing bubble will likely have an even greater effect on the global economy than a stock price collapse.
The bottom line of all this is that, in order to maintain itself now, the global economy requires an ever-greater and magical asset inflation—fueled by, and fueling in turn, ever-increasing doses of credit gluttony.
Our Great Global Financial Bubble—first in stocks and then in credit, bonds and now real estate—is an order of magnitude larger than the Great Financial Bubble of 1896 to 1929. So it is probable that the resulting collapse will this time also be an order of magnitude larger.
This collapse will have been caused by the parabolic and unsustainable excesses of the previous expansion, but the bust will inevitably create an ardent search for scapegoats and villains on which to blame the catastrophe. Naturally, that which is sought for will be found.
(This is the end of Part 4. Go to Part 5.)
—jim sloman, 3.28.04 for Apr 5
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