The Everyman Economist

Back in the 1940s, the Everyman could buy a house in the USA for $5,000 to $10,000. Even at those prices, however, there were naysayers who suggested that a house was a bad investment. In 1947, Time magazine wrote “the prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline.” In 1948, House Beautiful magazine further opined that ”the days when you couldn’t lose on a house purchase are no longer with us.” As if those thoughts weren’t enough, the view of Science Digest magazine in 1948 was that “houses cost too much for the mass market…..with the average price around $8,000, it is out of the reach for two-thirds of all buyers.”

So much for the naysayers of the 1940s. But the doom and gloomers continued to shout from their rooftops during the 50s, 60s, 70s, 80s and 90s, consistently warning the Everyman that the value of their homes would collapse.

At just about the turn of the 21st century they all stopped shouting. Instead, they were buying. They bought houses to live in, houses to vacation in, and houses to invest in. Credit flowed like tap water and it was easy to buy a house in any price range with virtually no money necessary. Suddenly, there was no doom and gloom, only blue skies and a warm sun.

And then it happened - the greatest housing collapse in US history and all the pain that went with it. And where were the naysayers? Right alongside the Everyman, in deep financial distress and with very little hope.

There are only a few examples of major market collapses throughout our nation’s history, but they all share one thing in common. A recovery followed each collapse, but it took many years to unfold. And so is the likley scenario with our current housing situation. There are already signs that prices in the lower end of the market may be bottoming out, but don’t expect too much more than that for quite some time. You will definitely not see those lofty prices of 3 years past and you might NEVER see them again. And here’s why.

Through the decades since World War II, the Everyman has seen continued increases in income. This consistent pattern has been the foundation of our economy and our spending. As long as we see our incomes growing, we buy. Unfortunately, we reached the heavens at least 15 years ago. Not every Everyman of course has achieved his greatest potential, but salaries overall have been bumping up against absolute ceilings for almost 2 decades. It was the housing bubble that gave the Everyman reason to buy well beyond his means, as he borrowed against the “implied” equity in his home. We know what happened next. Even with some future inflation, it’s impossible to envision an income explosion that would blast us back to and through the housing prices that we experienced a few short years ago.

And then there’s demographics. The baby boom population is huge and it’s aging fast. An overwhelming number of these boomers are owners of larger houses where they raised their kids and sent them off to college or work. Now they’re sloshing around in these big old houses and they want out. There are too many bedrooms, too much grass to mow and just too many expenses. But they can’t sell. Their neighbors are just like them and the youngins certainly can’t afford to pay the prices. So the prices of these larger homes have no place to go but down. The youngins are looking for starter homes and that market has already seen some large declines. With mortgage rates now below 5% and the government providing financial incentives, they are picking away at their first time home buying experience. They can finally afford to consider owning a house, even with a 25% downpayment. As a result, prices in the lower end of the housing market are beginning to bottom out and that’s good news. But that’s all the news. Everyone in between the top and the bottom is on hold. There are too many houses at the upper end that won’t sell and with the only buyers at the lower end, the mid-range housing market is a disaster. This is the harsh reality that won’t disappear any time soon and we have not seen the worst of it yet. Only after the economy goes into full recovery mode will the homeowners in the middle begin to see movement. Not so much in price, but at least some buying will return to the market and stabilize prices.

And that is the short to medium term outlook for housing in America. The highest end will always attract the rich and not many of us care what happens there. The high end for us normal folks will have a glut of baby boom houses for sale, with virtually no buyers in sight. The low end will continue to attract our kids, as they begin to make their way in life. And the middle range will be stuck in the mud. When the smoke clears, a house will be a place to live and anyone who is lucky enough to turn a profit will have icing on the cake. Otherwise, you can think of your home as you would think of your car. They are both necessities at some point, they are likely to be declining assets, and they both require a fair chunk of change to afford. Sorry, and I may be wrong, but the future of housing is no longer bright.         

“Is My Money Safe?” This is the #1 question the Everyman is now asking Everyone and if he’s not asking yet, he should be. Normally the answer would be a simple YES, but these are not normal times and the Everyman needs to be serious and prudent about the current financial landscape. In the old days, the Everyman’s money was tucked away in a small local bank, blanketed by FDIC insurance and under no real threat from changes in the economy. But times have changed and local banks have been replaced by global financial institutions offering a myriad of investments and accounts that confound the Everyman in these trouble times. And now we have some of the most prominent financial companies going from boom to bust in a matter of weeks, or even days. It’s no wonder the Everyman has no idea where his money may be going with the next news story. So take heed and look at your accounts NOW! You must be comfortable with the institutions that hold your money, and if you’re not, make some changes. In most cases you have no obligation to maintain an account with a specific company, so moving elsewhere is just a matter of painful paperwork. But better to be pained by paperwork, than to see the fruits of your labor go down the drain. So where should you go for safety and security? The best suggestion right now is to keep your money at a large money center commercial bank and deposit no more than $100,000 in any single account. You can either accept the savings rate, as low as it is, or buy US Treasury securities for additional safety. Most importantly, don’t look to salespeople for advice. Now is not the time to have someone sell you a product or investment that is out of the mainstream. Now is the time for “capital preservation” and the time to let the dominoes fall where they may, just so long as they don’t fall on you.