Thanks to the worst housing recession since the Great Depression, sky-high gasoline and energy prices and rising water shortages from global warming this suburbian American dream way of life is turning into an economic and financial nightmare. Let us count the ways of this nightmare…
Suburbia, exurbia, commuter towns, dormitory communities, urban sprawl into rural areas, edge cities, lack of public transportation, highways and reliance on private motor vehicle transportation are the sociological traits of the last few decades of American suburbian life. That McMansion plus gas-guzzling SUVs way of life was turbocharged in the last decade by a housing bubble and cheap gasoline and low heating costs. Given the biggest credit bubble and asset bubble and housing bubble in US history American looking for bigger and bigger homes moved farther and farther away from cities and centers of business, commerce, industry and work. The mean commute time for U.S. metropolitan areas was 25 minutes in 2006 but for dozen of millions of American households in exurbia that commute time was over one hour each way every working day.
Easy money (Fed Funds rate too low for too long, down to 1% until 2004) and the most lax supervision and regulation of the financial system and of mortgages allowed Americans to “afford” bigger and bigger homes farther and farther away from cities and centers of work: first suburbia, then exurbia, then rural sprawl, then hedge cities. Over time the distance that American had to drive from their homes to places of work and shopping and leisure grew as you could afford a seven-bedroom McMansion if you were 60 or 80 miles from a city or work rather than only 10 or 20 miles. With cheap gasoline and cheap energy and heating costs that lifestyle made sense. It was cheap to heat your monster McMansion, it was cheap to buy and drive a bigger and bigger gas-guzzling SUV and more of such SUV. We had not only a subprime and near prime and prime mortgage and credit bubble but also a massive auto loan credit bubble that – like for mortgages – allowed Americans to buy oversized SUVs and pick-up trucks with zero downpayment, zero interest, and negative amortization. Indeed the reckless auto loan bubble was as toxic as the subprime and mortgage bubbles.
The emblematic symbol of this SUV craze was the monstrous Hummer that was driven as a symbolic totem of American macho culture and justified as a way to support our troop in Iraq: too bad that this gas-guzzler GM beast was financing the coffers of unstable petro-states (the Venezuelas, Nigerias, Irans, Iraqs, and some Arab states) that were busy financing terrorists around the world and building thousands of schools of religious fanaticism and fundamentalist hatred (“madrasas”) around Pakistan and the Middle East.
But now this suburbian Amerikan Dream has turned into a nightmare.
For the last few decades over-investment in housing – the most unproductive form of accumulation of capital – has been heavily subsidized in 100 different ways in the U.S. government: tax benefits, tax-deductibility of interest on mortgages, use of the FHA, massive role of Fannie and Freddie, role of the Federal Home Loan Bank system, and a host of other legislative and regulatory measures.
The result was that the U.S. invested too much – especially in the last eight years – in building its stock of wasteful larger and larger homes and housing capital and of larger and larger private motor vehicles (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt – by the household sector, the government and the country – to finance the accumulation of the most useless and unproductive form of capital, housing and large private trucks (calling them cars is a misnomer) that provide only housing services to consumers and have no effect whatsoever on the productivity of labor. Even the dream of a well manicured green lawn is now threatened by a rising shortage of cheap water given global warming and the wasteful underpricing of water use – now a seriously scarce resource – in the American West. Now these McMansions and soccer-mom trucks and the broader sprawl of suburbian/exurban housing are now worth much less – in net present value terms – in many and different ways. First, you have the biggest housing bust since the Great Depression and a cumulative fall in home prices that will be at least 30%. Thus, the value of the biggest asset of the American household sector is now in free fall and up to 40% of households with a mortgage (21 million of them) may end up underwater, i.e. with negative equity in their homes, and walk away from them via “jingle mail”. Second, the market value of gas-guzzling SUVs is plummeting with gasoline prices well above $4 a gallon. Third, the rise in heating and transportation costs further reduces the values of suburbian homes located in the far boonies of exurbia and edge cities for two additional reasons: a) the high oil and heating prices makes it outrageously expensive to heat those excessively big homes; b) households living in suburbian and exurban homes that are far from centers of work, business and production that are not served by public transportation are burdened with transportation costs that are becoming unsustainable given the high price of gasoline. So on top of the housing bust that will reduce home values by an average of 30% relative to peak high oil/energy prices make the same large homes in the far boonies of suburbia/exurbia worth even less – probably another 10 to 15% down – because of the cost of heating palatial Mac Mansions and because of the cost of traveling dozens of miles to get to work in gas guzzling SUVs. Thus, it is time to stop this destruction of national income and wealth that a cockamamie decades long policy – subsidizing the accumulation of wasteful and unproductive housing capital, not building public transportation and subsidizing car driving via bigger and bigger highway – has caused.
In the meanwhile this bust of housing and this spike in oil and energy prices creates a severe economic and financial crisis that will radically change where and the way American live, work and play. On top of the ghost towns of the American West – the thousands of empty new homes in new suburbian and exurban developments in California, Nevada, Arizona, Florida and other states – you will have the decay of existing suburbian communities as millions of foreclosures will lead to the economic and social decay of existing towns: fiscal crises from the housing bust, municipalities defaulting, hundreds of empty and vandalized foreclosed homes in housing busted towns and communities, fall in public services, etc. The entire neighborhood goes when rows of foreclosed and vandalized homes reduce the value of remaining homes, increase crime and destroy the fabric of entire communities. The entire social fabric of many suburban and exurban communities is starting rotting to its core. Millions will lose homes and move to rented homes and apartments (or give up their home deeds to their creditors and have th
eir ownership converted into medium term leases on their homes to avoid formal foreclosure); leasing and rental will reduce the social benefits and community building associated with home ownership.
Next, cities and metropolitan areas will rethink their policies towards urban sprawl: greater public transportation, greater housing development closer to city and business/industry centers rather than in far flung commuter towns, greater urban density and concentration rather than endless sprawl, end of the explosion of traffic and road congestion, reduction in driving and in air pollution, more people moving to live in apartments and cities served by public transportation rather than suburban homes.
Moreover, patterns of leisure will also change over time: in the short run the recession and the severe squeeze on the real incomes of US households from high oil, energy and food prices means much less discretionary spending: less dinners out of suburbian homes (more dining in rather than dining out), less movies and more TV watching, less socializing outside of the home (as parents puts curfews on driving costs of teenage kids) and more socializing at home and over the internet (Facebook, MySpace, and even tax rebates spent on surging online porn traffic as cheap forms of home “entertainment”), less vacations in far flung location and more “staycations” (vacations staying at home).
In the short run this changing pattern of consumption will make the recession more severe through an “animal spirits” effect. U.S. households are already depressed (not a “mental depression” as suggested by a McCain advisor but a real economic/financial depression) because of falling home prices, risk of foreclosures, losses of jobs or concerns about losses of jobs, rising oil, energy and food prices, flat incomes and wages and now falling real incomes, high costs of health care and education, falling stock market wealth, high debt ratios (mortgages, credit cards, auto loans, student loans), high and rising debt servicing ratios (given reset of mortgages and consumer credit interest rates), concerns about globalization and offshore outsourcing and a general middle class malaise that is now hitting both blue collar workers and white collar workers, working classes as well as middle classes. And now the American dream of a happy suburbian life with a McMansion, gas-guzzling SUVs and well-watered manicured lawn is threatened by collapsing home price, surging gasoline, heating and energy prices, and a shortage of cheap water given global warming and massive underpricing of water use.
The Keynesian animal spirits will worsen in the short run the economic recession. The 1990-91 recession was initially caused by the real estate – commercial and residential – bubble of the 1980s in the American west and south going bust in the late 1980s causing a severe banking crisis (the bust of thousands of Savings & Loan thrifts specialized in real estate lending) and leading to an economy-wide credit crunch by 1990 that tipped the economy into a recession by June of 1990. On top of this housing and credit bubble going bust that caused the recession the Iraqi invasion of Kuwait in August of 1990 caused a significant spike of oil prices that worsened that economic downturn until the spring of 1991 when – after the war with Iraq was won – oil prices fell and business and consumer confidence recovered. That recession caused by a housing bust and an oil shock was also called the “CNN Recession” as in 1990-91 nervous Americans stayed home watching the Iraq war on TV rather than going out to dine, to enjoy the movies at the Cineplex and shop at their suburbian malls.
Today a same phenomenon is occurring: with gasoline above $4 dollars a barrel we have “staycations” rather than real vacation, less trips to the mall (unless you need to stuff yourself on cheap Chinese goods at Wal-Mart), Nintendo/Playstation and internet home entertainment. And now with the Wii you don’t even need to go to the golf course or to the gym to exercise; you can play virtual golf or any sport from the comfy seat of your potato couch. America: welcome to the brave new and cheap world of virtual reality, virtual vacations and virtual entertainment and leisure.
So the biggest credit, housing, auto and asset boom and bubble in U.S. history is now cracking the suburbian “American Beauty” dream and turning it into an “American Ugly” nightmare. The economic, financial, social and political consequences of this earthquake will be radical and significantly change the American way of life for the long run.