Housing bubble apologists often dismissed bubble believers’ concerns out of hand with the following party line: Southern California’s prices only fell last time due to substantial job losses due to the dislocation of the defense industry. (no matter that the Eastern Seaboard had a similarly-timed slide and did not attribute it to the same) Such job losses cannot happen again; the job market is too strong, diversified, and recession proof.
In a number of past posts, I have connected the dots related to current job strength, even while realizing that it was not just the number of jobs, but in particular, the type of jobs that matters when it comes to affordability. Indeed, it is important that the prices of houses are not supported by those that already live in an area, but rather by those who are coming to an area. On the flipside, as an area becomes too expensive, those unable, unwilling to remain, or tempted by their good fortune will sell to realize their gain and move elsewhere. We have already seen San Diego County’s negative growth rate (in spite of a substantially increased housing stock). These moves happen slowly, and reacclimating boiled frogs to lukewarm pots makes them believe they are actually in frigid arctic waters.
What the mainstream media failed terribly to see was that it is exactly the excesses created during the bubble that must be punished in a downturn. First, it was the mantra that Real estate never goes down. Then, it was a “soft patch”. Later, a “Soft Landing”. Then “A souffle’”. All of those jobs due to lending and construction that have paved the way to even higher housing prices have now turned into a vicious downcycle. Remember that the “Zombie Financial Media Awareness Week” is just a few weeks away. Why is it that the media has no memory that bubble blogs were appearing in early to mid 2005, warning of excesses in lending and finance?
Perhaps just as appropriately, one would ask, why are their virtual undead still haunting the pages of major news outlets. Featured writers, no less, that give denial a new face. It might be valuable to read what Wikipedia has to say about denial before visting one of our local train wrecks.
Denial is a defense mechanism in which a person is faced with a fact that is too painful to accept and rejects it instead, insisting that it is not true despite what may be overwhelming evidence. The subject may deny the reality of the unpleasant fact altogether (simple denial), admit the fact but deny its seriousness (minimisation) or admit both the fact and seriousness but deny responsibility (transference). The concept of denial is particularly important to the study of addiction.
After reading that, you might be able to find perhaps even a bit of humor in a piece written by our own lovable village dolt based out of San Diego, George Chamberlain just last week:
Let me begin by passing along my congratulations to the many people who are celebrating the current situation in the housing market. In concert with much of the national and local media, they have been able to artificially construct something that has never —- I repeat, never —- been done before: drive down housing prices at a time when unemployment is low, the economy is booming and consumer confidence is approaching record highs.
A column I wrote about a year ago on the housing market triggered more hate mail than any other topic that I have discussed. I needed to check underneath my car and use a food taster for a couple of weeks after I suggested that the situation was dramatically overstated.
That this level of denial exists, is not prima facie a surprise. That a person so disconnected from reality, even after it is made known to the world can get published can only mean 2 things. Either the editor couldn’t care less about what is being written, or is in similar denial. Not once does the discussion turn to the primary driver of housing prices; job creation. Stagnation can already force prices down with an increasing housing stock; much more with out-migration.
If you read the entire piece, you’ll see that his article exhibits a number of different defense mechanisms. From minimisation to transference to outright denial. One might wonder if he is addicted to house price appreciation. We sure know many San Diegans are addicted… and their only fix is through another equity extraction. Wall Street just shut off the spigot, and it’s very interesting the stages of grief that participants go through as an outsider.
It wasn’t hard to spot where our problems lied, even a year or 2 ago. Jonathan Lansner was able to identify some time ago that housing related to 17% of Orange County’s entire job base. Many observers have noted that a healthy balance is between 6% and 12%. Just to bring us to parity with a healthy balance, we would have to increase our unemployment figures by 5% to 11% of the total workforce. Those are depression-level statistics.
As scary and frightening as they may seem, there are some actions that they everyday person should have done in the past 2 years: (and might still be able to pull off before the slide gains even more steam)
1. Eliminate any speculation that is lending or real estate related: sell any properties, refinance historic-low fixed rates, sell homebuilder or financial stocks, mutual funds, and even banks.
2. Housing-recession proof your career. Find a new one, or develop your business plan to excel when downturns happen.
3. Reduce debt, and raise cash or liquid investments. This one will allow you to ride out any temporary storms as well as purchase property in 3 to 5 years from now when they once again return to appropriate levels.
4. Pay off any adjustable debt, hoard cash. Many people are carrying unhealthy levels of debt. While comical, the man riding the lawnmower in debt up to his eyeballs is all too real in America. Don’t be the person who loses their home to out of control personal expenses.
If George Chamberlain wants positive to come out of this, Southern Californians need to break their cultural pathology and begin to save, invest, and build, rather than consume. Otherwise, there is nothing for us to look forward to. Last time, the scapegoat was the defense industry. This time, it will be the “Subprime Implosion”. Years from now, people will attribute the downturn, not with the excesses that led to it (that would mean assigning the blame to ourselves and our human nature), but with the trigger that collapsed the house of cards we had built.
We have met the enemy and he is us.