The U.S. housing bust: Excess investment and its discontents
By Seth Sandronsky
Journal Contributing Writer
Oct 17, 2006, 00:35
The sale prices of existing homes in the Midwest and
Northeast are falling as over-all sales across the country are declining, according
to the U.S. National Association of Realtors. In the West, home sales are also
down but sale prices remain roughly the same.
Recent Commerce Department data shows that the median prices
of new home sales was up in August over July this year, but down from August
2005. Crucially, the new home sales prices do not reflect homebuilders�
incentives for buyers, i.e., paying their closing costs. In other words, the
decline in new home median prices this August from a year ago undercounts the
actual fall in prices.
For a closer look at the action on new home construction, we
turn to Lennar Inc., which builds new homes across the nation. For its most
recent quarter, the firm�s profit was down nearly 40 percent due to the
fall-off in new home construction. Lennar has offered buyer incentives in an
attempt to counter the slowdown, a strategy to compete with its rivals in the
It is worth noting that investors in home building firms
behave a little like investors in other industries such as airlines, autos and
computers. Investors in these varied sectors of the economy part with their
capital in the hope of a profitable return on it at some point down the road. And
here is the rub concerning this similarity.
Not one of these investors can predict on the basis of
current and past information what the future holds for their investments, at
least not with any objective accuracy. Why? Partial information about the
future defines a market economy.
A slew of future variables are uncertain when the market
organizes people and resources. There are many examples of this uncertainty. They
range from the prices of credit and energy to labor services and raw materials
in the days, weeks, months and years to come.
What is becoming clear is that there has been excess
investment in new home construction across the U.S. Investors in companies that
build homes no doubt saw the rising market prices of their commodity and
expected the numbers to continue upward. The �proof� was the historic boom in
new and existing home prices, the presumed evidence of a rock-solid investment.
Consider investors in new home construction who had to feel
quite nifty about the future of the real estate market. It was, after all,
rewarding them with healthy profits. The old saw build it and they will come
appeared as true as the rising sun in the morning.
When returns on investments are profitable, optimism for the
future tends to rule investors� behavior. They become bullish, in the language
of the marketplace.
To recognize the future risk of over-investment in a
commodity is to be bearish. Usually, such an ursine stance is off the radar
screen when a company�s profit and market share are growing.
Inevitably though, when a firm chugs into the zone of
slow/no growth, the process of over-investment becomes easier for the eye to
see. Typically, this viewpoint emerges after the facts of falling prices and
unsold inventory are as plain as day. Market hindsight can be so clear that
Some wags have called this trend the paradox of capitalist
investment. In time, however, their critical insights tend to fade from public
view. Later, the conditions that created investor optimism in the first place
go down the memory hole as growth returns -- until the next market downturn.
The dot-com/high-tech stock boom and bust of the second
Clinton White House is a case in point. That period of historically high stock
prices and over-investment led to a recession, or contraction of growth. Then
expansion resumed, and thoughts of this slow/no growth period faded.
Currently, the U.S. real estate market is cooling. Investment
in home building is in decline, according to a recent Commerce Dept. report on
the U.S. economy�s second-quarter growth. National economic growth has slowed
from its rate of expansion in the first quarter.
As companies such as Lennar cut their costs, there is a
ripple effect in sectors of the economy linked to the rise and fall of home
prices and sales. This tightening trend can spur employers to cut the benefits,
hours and jobs of employees in a gendered and racialized labor market.
Now and before, employers and investors make the diverse
U.S. working class pay for over-investment with reduced living standards. In
this way, a market economy tries to create conditions of new, profitable
outlets for investment capital, such as the hiring of younger and cheaper
workers without health care and retirement pensions. This is one hell of a
brutal way to organize a modern society.
Sandronsky is a member of Sacramento Area Peace Action and a co-editor of
Because People Matter, Sacramento's progressive paper. He can be reached at firstname.lastname@example.org.
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