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Peak Housing, Peak Fraud, Peak Suburbia and Peak Property Taxes

Peak Housing, Peak Fraud, Peak Suburbia and Peak Property Taxes thumbnail

Once again pundits are claiming that housing is “finally recovering.” But they’re overlooking three peaks: Peak Housing, Peak Financial Fraud, and Peak Suburbia, all of which suggest years of stagnation and decline, not “recovery.”

Here is the latest Case-Shiller index, which has traced out a nearly textbook bubble and a return to the mean that has been artificially restrained by trillions of dollars of Federal subsidies and backstopping of the housing market:

Here is a classic bubble and pop. Note that the “recovery” to bubble heights never arrived: 12 years later, the NASDAQ is around 3,000. If we adjust that by the 33% inflation since 2000 calculated by the BLS (Bureau of Labor Statistics), then the NAZ is around 40% of the 2000 peak.

Note that there were several “recoveries” that fizzled before the index finally round-tripped to pre-bubble prices. On the Case-Shiller, that suggests an eventual drop from 130 to 75, the pre-bubble level.

Like all other systems that have run their course, housing follows an S-curve. After the vaporization of assets and cash in the Great Depression, America had largely reverted to a nation of renters. The postwar boom of plentiful jobs, cheap, government-guaranteed VA mortgages and virgin flat land near cities combined to fuel a suburban housing boom.

By the 1960s, the belief that housing was the bedrock of middle class wealth was firmly established. This was the explanation and motivation for buying a home: “housing never declines,” and a rapid rate of household formation made it easy to sell a house to somebody else.

The high inflation of the 1970s and subsequent leap in housing prices embedded another key concept in the national psyche: housing wasn’t just a forced savings plan that doubled as shelter, it was the speculative road to riches.

The mini-bubble of the late 1980s popped, sending housing into a six-year slump, but Peak Financialization and Peak Financial Fraud arose to goose housing to a new and spectacular credit-fueled bubble of frenzied speculation.

That systemic fraud was a key dynamic of the housing bubble is undeniable: everyone from those buying houses with no-document loans to money-center banks selling fraudulent mortgage-backed securities was relying on fraud. Peak Fraud isn’t a necessary feature of financial bubbles, but it is often a causal factor among others.

If you have any doubt that the Crash of 1929 was accompanied by Peak Financial Fraud, I invite you to read John Kenneth Galbraith’s The Great Crash 1929.

Alas, all bubbles pop, and now the world has changed. The overt fraud has been driven underground, but the repercussions of the institutionalized fraud of MERS and mortgage-backed securities hasn’t been resolved; it remains in the market’s blood stream, slowly poisoning what’s left of the private mortgage market.

Peak Fraud will not be returning to the housing market, but its toxic consequences linger in the system. Does anyone seriously think the 4.4 million home equity lines of credit loans (HELOCs) on lenders’ books are priced at their true market value? Accounting fraud in the form of overstated mortgage valuations is still rampant, and everyone knows it.

The rapid household formation of the 1950s and 60s period has given way to a generational decline. When housing, credit and oil were all cheap and plentiful, single people could buy condos and homes themselves, even with modest incomes. Credit may be cheap but housing and oil are not, and inflation has ravaged incomes, as noted here many times.

The demographics simply don’t support rapid household formation; household formation is following an S-curve, too.

Then there’s Peak Suburbia and Peak Commuting to Distant Exurban McMansions. Here is a chart that correlates GDP (gross domestic product), the broad measure of economic growth and prosperity, with the price of oil and wages. Note that rising oil costs and stagnant wages take the wind out of the economy’s sails.

Simply put, declining wages and high oil prices erode households’ ability and willingness to buy a surburban home and pay for the gasoline needed to commute hundreds of miles every week.

Declining gasoline consumption is not an outlier, it is also a generational shift. Mish recently addressed this dynamic: Demographics and Changing Social Trends Behind Gasoline Sales Plunge, and I covered the long-term trends in Why Is Gasoline Consumption Tanking? (February 10, 2012)

Once the belief that housing is the bedrock of middle class wealth fades, so too will the motivation to risk homeownership in an economy that puts a premium on mobility and frequent changes of careers and jobs. We can discern a sea-change in this chart of housing activity: despite trillions of dollars in subsidies, guaranteed mortgages and other types of Federal support, the housing market has not recovered, it has only stopped plummeting:

Only one aspect of housing hasn’t yet peaked: property taxes. If the risks of homeownership weren’t apparent before, they certainly are now as local governments jack up property taxes to indenture homeowners into tax donkeys.

Note that property taxes declined significantly in the previous recession (2000-2002), but they rose steeply in the 2008-9 recession, and continued climbing. The recent modest slippage may have several factors: lower valuations in states that set property taxes on assessed values, tax revenues declining as homes in foreclosure languish with unpaid property taxes, and so on.

Anyone claiming that property taxes have peaked will have to support that claim with evidence that local governments have found other sources of tax revenues to replace property taxes. Until that dynamic changes, then local government will have every incentive to jack up property taxes by any and all means available.


 Charles Hugh Smith, Of Two Minds

8 Comments on "Peak Housing, Peak Fraud, Peak Suburbia and Peak Property Taxes"

  1. DC on Wed, 25th Apr 2012 10:03 pm 

    And to add insult to fraud, all those poorly built clapboard and plastic houses decay rapidly, except under ideal conditions. Better strip all those shoddily built homes for salvage fast amerika, because once decay sets in, they wont even be worth that.

  2. MrEnergyCzar on Wed, 25th Apr 2012 11:35 pm 

    Great graphs!!


  3. BillT on Thu, 26th Apr 2012 1:12 am 

    Great article! Yes, we seem to be at peak everything even peak ignorance. When you reach the peak there is only one way to go. I think the next few decades are going to be very interesting.

    And, yes DC, the houses built in the last 20-30 years are crap, built to minimum standards and with the cheapest, disposable materials possible. After all, profit was the motive not quality or longevity. Think of all the asphalt (oil) shingled roves that will need replaced soon. Fifteen to 25 years lifetime, max. When they start to go, the rest follows quickly. Vinyl siding loses it’s flexibility, the particle board underlayment swells and falls apart, etc. In less than a generation, most homes will be worse than trash.

    How do I know. I was in the home building trade for most of my working career. My dad built homes to last 100 years. My last employer built homes that may not last until the 30 year mortgage is paid off.

  4. DC on Thu, 26th Apr 2012 3:53 am 

    We are of the same mind on this subject. Its my considered opinion, that a reasonably well-off citizen of say, ancient Rome, Or China, or in the ME area, (Perisa basically), probably lived in more durable, far less toxic, and much more liveable homes than we do here in the ‘advanced’ 21st century. In this age, we seem have compeletly forgotten even *how* to build a home, or indeed any structure that can last more than 3 or 4 decades for say ‘homes’ and maybe 6 or 7 in case of civic or commerical construction. Even our mighty skyscrappers have very short shelf lives. Most are meant to be torn down after 4 or 5 decades at most these days.

    I seriously doubt, if any North American asked for a home designed to last for a century or longer and capeable of being liveable even in the absence of centralized gas\water\electricity, youd probably get a dazed and confuzed look from near 100% of ‘contracters’. They litterally would not know what to do. I know in Europe or Russia, you can stay in hotels or homes than are hundreds of years old and very liveable. Our ‘best’ by contrast, will be toxic piles of rubble in a fraction of that time if left to nature. Add the finacially toxic FIRE economy to finance these compressed dirt and sawdust wonder-homes and it no suprise were in the mess this article speaks of.

  5. BillT on Thu, 26th Apr 2012 9:42 am 

    DC, in consideration for the current builders situation, a home that would last for 100 years is still possible, but it would cost 10 to 20 times what the disposable homes of today cost. Go to any home that was built in the 1800s and is still lived in today and you will find a totally different list of materials and methods. Brick or stone walls, slate roves, actual timbers and planks of solid wood and thick.

    I lived in a small, two story, oak log home built in 1726 and it is still there today. Even the roof is over 90 years old and is standing seam metal. The oak was so hard, it took drill bits made to drill metal to put a hole in them for a nail to hang a picture. The floors were original planks over 1 inch thick and up to 22 inches wide and the full 22 foot length of the house. Baring demolition, odds are that house will still be there in another 200 years. But all of it’s newer neighbors will be long gone.

  6. Arthur on Thu, 26th Apr 2012 10:08 am 

    In Holland the housing market is flat on it’s face. Number of new mortages down more than 40% compared to last year. Real reason: people still think of their homes as ATM’s and cannot accept that in order for the market to return to previous number of transactions, prices need to come down at least 30% according to a top RABO banker. House owners however are waiting for an economic recovery. They are waiting for Godot. I saw it coming years ago, hesitated to sell my paid-off apartment, because I was afraid the resulting bag of euros would evaporate Weimar style, before I had the chance to buy something better. Ah well, luxury problem compared to these armies of poor people who will be ‘under water’ soon with their mortgage.

  7. J.J.H. on Thu, 26th Apr 2012 11:27 am 

    There is a cost of quality which US citizens are not willing to pay. This reflects the US society i think. The overall mentality is; use it and throw it away. Nothing sustainable about that.
    Houses in Holland are all built of concrete, the only wood which is uses is for the stairs and windowpanes. Unlike US houses, which are primarily build of wood, the Dutch houses will last for years and years. But the downside is the price. The average housing price is The Netherlands is about 230.000 euro. And this is just a simple 3 bedroom house with no land. If you pay that amount of money you want a good quality house. Houses in Holland / Europe are sold many, many times during their “lives”. Destruction of a house is seldom.
    So the American homes are not suitable for reselling, they are of bad quality or in need of some serious renovations. Therefore they are not worth the money which you paid for it when it was new. Here we have a bubble …….

  8. DC on Thu, 26th Apr 2012 2:16 pm 

    If you dont mind me saying so JJH, I think there is more to it than simply not wanting to pay ‘quality’ cost. The point I was trying to make, even amoung people than could(in theory) afford to build a durable multi-geneerational type home in NA, they practically never do, even when they have the means to do so. The ‘rich’ homes in NA, are as poorly and flimsily built as the homes of the ‘poor’. They are just better finished, and less drafty and leaky, but the same idea runs thro all N.A constuction. Let me give you another example. A distressing # of Canadians esp in the northern areas, acutally belieive that there homes are better built as well as insultated. They actually crow about this and think we know how to ‘build’ to the climate. Go as far north as you like, the buildings youll ecounter are the same spec and style as the ones youd find in texas or Calif!

    They are carbon copies of the same things youd bascially find in say..California. The only difference. some 2×6 instead of 2×4, slighly more fiberglass insulation and slightly thicker glass. After that…nothing. Canadians build there homes the same way Florida does except with a few marginal improvmements. In short, cities and homes arent built to the cold enviroment. In Scandanavida, different story. They actually know how to build cities and homes for the envoriment they inhabit.

    Your 230k Euro works out to 299k Can\Us. Guess what average home price in Canada is atm? 336k.(about 258k)Eu And guess what, there all sh*t. Not 1% would last a week w/o outside gas-power-water. Only contcrete we use in NA is for foundations and basements, and sometimes I bet they even skip that too if they can. There has been a huge shift in NA over the last 6 7 decades. Weve been…trained if you will, to accept shoddy and disposeable as ‘normal'(and the economy has been ‘ajusted’ accordingly) and properly made and durable, as something to avoided at all costs. Along the way, the knowledge of how to build properly has largely been lost as a side-effect of our, throwaway mentality One of the many legacies corporate rule will leave us. Building a post PO world will be 10x harder b/c we no longer know to to build properly or feed ourselves.

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