A sharp reversal is now hitting the US housing market: another of this system’s endemic boom-bust cycles. As is widely known, over the last decade at least, while the US economy became sharply more unequal (rapidly rising gap between rich and poor), it managed to avoid a severe recession. Goods and services purchases kept rising fast enough to keep unemployment from worsening as much as it otherwise would have (given outsourcing, automation, and other factors diminishing the quality and quantity of jobs in America: see Stanley Aronowitz, Just Around the Corner: the Paradox of the Jobless Recovery, Philadelphia Temple University Press, 2005).
The remarkable economic reality was that American workers’ real wages did not rise across these years. Their stagnant wages would not have allowed those rising consumer purchases. What financed them instead was debt. The US working class took on levels of personal and household debt never before seen in this or any other country. Some of that debt (credit cards) was unsecured by any collateral. But much of that debt was secured by home mortgages. American workers borrowed massive amounts of money at historically low interest rates by increasing their mortgage debts. Thus the US housing market enabled American workers to borrow more, which they used to make the rising purchases that kept the economy from sinking into deep recession or depression.
Basically, it worked like this. People borrowed to buy or expand a home. Housing prices (home values) were bid up. With more value in their now higher-priced homes, American workers had more collateral with which to borrow more. The boom in building and improving homes generated a huge portion of the rising consumer spending that kept the US economy afloat. This cycle of borrowing-building-and borrowing more-and building more produced an historic run-up in home prices alongside an historic rise in consumer debt. The rapidly increased borrowing allowed all kinds of consumer spending to rise, not only spending on housing. It all worked out very nicely so long as borrowing and spending kept rising and raising each other.
But the building has now stopped growing and started tanking. The LA Times reports that the California Realtors Association recently adjusted its projection for total housing sales in 2006 from a fall of 2 per cent to a fall instead of 16.8 per cent. Hello! Usually, where California goes, so goes the nation. Thus, the chief executive of the largest homebuilding corporation in the US, D.R. Horton, Inc., told investment analysts that his company’s national sales “fell off the Richter scale” in June, 2006. According to Money Week magazine, Ameriquest — a leading US mortgage lending company — recently announced that it is closing 229 branches and laying off 3,500 employees. The mortgage lending business is tanking as housing sales drop.
Drastically fewer new home sales have numerous economic effects. They undermine the building of new homes and thereby reduce employment in the home building businesses and in all the businesses dependent on home building (furniture producers, mortgage lenders, appliance manufactures, landscapers, etc.). Consider, for instance, that California now has an historic 500,000 licensed real estate agents: one for every 55 adults in the state. With fewer homes being sold, these people will compete within a fast shrinking real estate market. Many will be unable to earn an income and forced to accept jobs in other industries at lower pay, thus exerting downward pressure on pay scales generally.
Falling new home sales will force down new home prices. Sellers of older homes will face competition from falling new home prices, so they, too, will lower their prices to find buyers. Falling home prices generally reduce the “home equity” that can function as collateral for mortgage loans. Borrowers will find it harder to get mortgage loans even as they become increasingly anxious about the declining values of the homes they have borrowed against so heavily. Foreclosures are rising nationally as owners cannot maintain payments (since adjustable rate mortgage payments increase with rising interest rates).
Thus we face rising unemployment spreading out from declining home building plus reduced mortgage borrowing plus rising mass anxiety about household debt and about falling home values (most Americans’ largest single asset — if they have any appreciable assets — are their homes). Under these conditions, the rising tide of purchases of goods and services made possible by the cycle of home building and mortgage borrowing is not only ending, it is reversing at a fast clip.
The housing boom is going bust and will, unless offset by some equally massive economic improvement elsewhere, take the US economy down with it. No such offsetting economic change is now on the horizon. Nor do US leaders show an awareness of the problem or a plausible solution. Bush has nothing to say. Federal Reserve chief Bernanke, according to the LA Times article, told Congress on July 20, that the US housing decline is “orderly.” Nor have the utterly compromised Democrats anything much better to offer.
Finally, much of the money lent to US homeowners as their mortgages ballooned came ultimately from Japanese and Chinese lenders. They made such loans as investments of the dollars they had earned from their exports to the US (far larger than their imports from the US). Japan and China — both among the world’s four largest economies — will be hurt by any sharp downturn in US consumer spending. They will have to reassess their domestic economic and foreign trade situations. They will further question whether to keep their investments in US dollar mortgages and the US economy generally. They may well dump such US investments in favor of other uses and other places for their money. If so, their decisions will, in turn, have all sorts of further effects on the US including rising interest rates and unemployment.
The American working class is very likely in for rough economic times made more dangerous by their huge personal debt. Social tensions in the US will continue to rise with or without diversions provided by Rove and Bush (Christian fundamentalism at home, unilateral militarized imperialism abroad alone or with “partners” and “coalitions,” domestic jingoism, homeland security alarmism, etc.). And still no organized political opposition to channel the riding tension into progressive social change.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002).