Home on the bear market range – the United States will face a 10 to 15 year real estate bear market. Hard to believe but we are already 5 years into this economic trend. The failure of Quantitative Easing in Japan.
Can Americans cope with a 10 to 15 year bear market in real estate? On this front I have good news, and bad news. The bad news is that we are likely to face at least a 10 year bear market in real estate thanks to a lost decade in household income and the continued erosion of the middle class. Home prices can only reflect the underlying income of households paying the mortgage. Clearly with record foreclosures many cannot accomplish this financial Herculean task. The good news is we are already 5 years into this correction (so either we are half way or one third closer to a bottom). For the United States this is a new experience because we have never seen an annual drop in home prices on a nationwide basis outside of the current crisis. People point to the Federal Reserve as the knight in bailout armor for housing but look how far that has gotten us in the four years since the crisis started. It is safe to say that home prices will face a 10 to 15 year bear market so let us examine the details carefully.
The financial tipping point of peak debt – Total credit market debt owed increased from $28 trillion in 2001 to over $52 trillion in 2011. Household debt contracting while Fed juices up the banking sector with more debt.
At the dark heart of our financial dilemma is debt. Too much debt was used to bolster households during the real estate bubble and now too much debt is being used by the government to bail out the financial sector. Is there a tipping point in the amount of debt the American economy can shoulder? I believe there is and looking at the data carefully we begin to see unusual patterns not seen in a generation. The mosaic of tools used for this financial crisis would have worked if the problems we faced were merely issues of confidence. Of course the problems were very real and dealt with more than just perception and instead of confronting the reality of an over leveraged debt addicted machine we have only stepped on the accelerator. Yet this time instead of credit flowing to households for added game rooms or a trip to Hawaii credit is being extended to Wall Street courtesy of the Federal Reserve. Total credit market debt owed jumped from $28 trillion in 2001 to over $52 trillion today. During this time GDP went from $10 trillion to $14 trillion. You do the math where the growth is occurring.
Student loan shark industry – total revolving debt contracts during recession while student loan debt increases by a stunning 80 percent on an annual basis. A college degree for working at McDonald’s?
College sticker shock is probably stunning many parents as college aged students now sign their intent to register at thousands of schools across the country. You can almost feel the panic when Johnny or Suzie tells mommy and daddy she is going to University of Break the Bank while they watch their home equity plummet. What should be a proud time is now becoming a scary prospect for many parents looking at backbreaking student loan debt. If not the parent, many teenagers are looking at going into debt similar to taking on a mortgage without even owning a brick and mortar house. Many private schools now charge $50,000 or more per year in tuition and fees. Given that the average annual income for an American worker is $25,000 this one year cost is daunting. In the past if you picked the wrong major or school you ended up with a nice looking piece of paper and a likely opportunity to work in the blue collar world as a backup earning a relatively decent income. Today, pick the wrong career and school and not only do you have that same piece of paper but you also have limited prospects in finding even a basic job to service your college debt, forget about paying the rent or filling up your car with $4 a gallon gas. To expect teenagers to pick the right college and have their lives figured out early on is a bit much to ask. Students in the past did not have this same albatross hanging over their head. The big problem now is the massive cost of college.
Low wage capitalism – Newly added jobs are coming from lower paying sectors while productivity increases and profits filter to the top of the economic class. 3,500,000 high-wage jobs lost during recession and only 179,000 have been added so far.
One of the most troubling aspects of this “recovery†is how it is being achieved. We keep hearing about the wonderful Wall Street recovery yet a large portion of this is being created by extracting productivity from workers and stifling wages. Obviously if you scare the working and middle class and give them no job protection then many will retreat to their dark corner. Yet the reality is, these same companies are borrowing at subsidized rates from the Federal Reserve and using the taxpayer as a safety net. This economy is operating under a reverse Robin Hood effect where you steal from the poor and working class and redistribute the wealth to the top. The political class does not represent the people because as things stand, money buys power and many more Americans are losing their voice since they do not have funds to purchase lobbyists. The below chart is one of the more disturbing confirmations of our disappearing middle class.