Thursday, August 31, 2006
The cost of going West
So here in the land of $750,000 “starter” homes, and $500,000 “fixer-uppers,” it’s easy to get nervous when you see reports of home starts falling by 4.3% (LAT 8/25/06). The housing market is definitely cooling off. One can only hope it isn’t yet the first stages of the impending California property collapse that has the potential to destroy the American economy and make the great depression look like the 1980s. It’s basic economics and demographics folks, and it is going to happen—sure as the Big One. To start with, consider that California real estate values were in line with the rest of the country for 120 years--because land is land, and land without water isn't worth more no matter how good the views are. That’s right, clear up to the 1970s, even throughout the massive California population boom of the 1950s, housing costs in California were within a few percentage points of housing costs in Iowa. What changed? In the 1970’s two populist political movement took control of the California real estate market: rent control and growth control – and within two—yes, only two—years, housing costs in California started to out pace the nation by double digits. (See Excluded Americans, William Tucker) Of course, developers and California’s existing landed gentry didn’t complain, they were making out like bandits, and getting to masquerade as caring environmentalists in the process. It was the next generation that had to pay the bill, once California’s housing costs passed 200% (and still climbing) of national average. These poor folks are now spending over half their incomes for housing on which their parents and grandparents had often spent as little as 10% (see Discovery of Freedom, Rose Wilder Lane). So where is the bigger problem? It’s in the demographics. The largest portion of the American population consists of the Baby Boomers, which were the last generation to get a toehold in California real estate—and they are now getting up there in years. When they pass on (on the tail of their parents, who are a bulk holders of California real estate) and all those homes suddenly come onto the market at the same time, the value of California real estate is going to plummet, leaving all those in the younger generations who are holding interest-only mortgages facing certain bankruptcy. We’re talking about hundreds of thousands of families going bankrupt all at once. And of course, they will all be lobbying for a bailout, a bailout that will make the Savings and Loan bailout of the last century look like a Republican homeless handout. Guess who’s going to be left holding the bag? It’s you, the rest of America. Californians will have gotten a free ride in Eden for the last 50 years, and you, your children, and grandchildren are going to be presented with the bill. It will be a generational transfer, like the looming Social Security collapse—only with a geographic insult added to the injury.