If You Build It - Will They Come?

The Daily Reckoning PRESENTS: House “affordability” reached a 14-year low according the U.S. Department of Commerce; foreclosures are up 27 percent so far in 2006. James Howard Kunstler disseminates his thoughts on the impending decline of the U.S. housing market. Read on…


An acquaintance told me a weird story yesterday. Let’s call him “E.” He runs an Internet consulting company here in Saratoga Springs. It employs about 25 people in a downtown building E put up a few years ago.

Last month, a freak windstorm ripped through here and took down the electric power for three days. E lost communication with the payroll service (a separate company) that issues his employee’s salaries. The storm happened in the middle of the day, Friday, payday.

The power came back on Sunday night, and on Monday two of E’s employees each asked for private meetings with the boss. Because of the storm, they said, the payroll company had failed to make electronic salary deposits in their checking accounts. They were concerned because they were late on their mortgage payments and without the past week’s electronic paycheck, they couldn’t pay their mortgages.

E told me that these were “high-level employees” with substantial salaries who were both living in “very high-end homes,” which around here would mean around a half-million dollars (and I know that in some parts of the United States, like Washington, DC, or San Francisco, a half-million barely gets you a “pre-owned” raised ranch). He said he was shocked to discover that his executives were living from paycheck to paycheck, in houses that by normal criteria (i.e. pre-bubble standards) they probably couldn’t afford.

“What if something happened to me?” E said. “What if I was hit by a bus? That would be it for the company. That would be the end of their paychecks, and what if they didn’t find another job almost immediately? I don’t want to interfere in their personal affairs, but I can’t help feeling that I really need to talk to them about this.”

Meanwhile, our cretinous, pandering local newspaper, the Saratogian, published a special real estate section on Sunday under the banner “Progress 2006.” The headline under the banner said, “If You Build It They Will Come,” and the accompanying photo showed a rank of beige McHouses in a new subdivision. The sub-head said, “Growth is the name of the game across the county.”

Spring here in the North Country brings with it a ripe expectation that the winter real estate doldrums will soon yield to raptures of zippy sales. Of course, this is based on the assumption that the year ahead will be like the recent years just past, only better! The sense of momentum in the real estate markets is reinforced by the fact that so much stuff has worked through the arduous permitting process and is just now coming up for sale, with even more stuff behind it moving through the cloacal pipeline – so to speak – so therefore the buyers will automatically appear drooling into their checkbooks.

I don’t think so. I think that what we are getting here is stupendously delusional behavior. The ebullience in the newspaper only tells me how much unexpressed subconscious terror lurks just below the surface of wished-for “normality.” For one thing, anybody who walks around this town can hardly fail to notice how the realtor’s signs are accumulating in the front yards. Nothing’s moving. Outside of town, in the suburban asteroid belts that only 10 years ago were cornfields and cow pastures, there’s a much more lavish supply of new houses. I detect an odor of bloodshed.

This has been a hot market for a while, because Saratoga is a historic “main street” town in pretty good condition with a high level of cultural amenity, close to the gigantic Adirondack Park. The three old cities nearby which comprise the employment centers of the Capital District – Albany, Schenectady, and Troy – are in such a state of squalid decrepitude that practically anyone gainfully employed has fled shrieking lately, and Saratoga has attracted many willing to tolerate a 30-plus mile commute.

For years following the two oil crises of the 1970s, the real estate market in Saratoga fell stone dead because the fear of rising gasoline prices and long lines at the filling stations remained so vivid. We’re headed back to scary gasoline prices again; only this time it will not be a temporary crisis. And this time, there will be a huge surplus of unsold houses. There will also be a substantial number of house owners getting in trouble with their mortgage payments, and one way or another, their houses may end up adding to the supply of available houses. There is also very likely to be trouble in the financial markets, with dark implications for the value of the U.S. dollar, for the movement of interest rates, and for the availability of further credit.

It makes my head hurt to imagine the coming carnage on the real estate scene here. Nationwide, the latest figures are not reassuring. Even hot markets cool off when evil economic winds blow. According to the California Association of Realtors, sales of existing single-family detached homes were down 24.1 percent, the highest year-on-year decline since December 1990 – when sales dropped 25.2 percent. The National Association of Realtors reports Massachusetts home sales are down 21 percent and listings are up 41 percent. In Florida, existing home sales are down 19 percent. In Alabama, existing home sales down 21 percent and listings up 17 percent. Pennsylvania sales are down 17 percent. Minnesota sales are down seven percent and inventory is up 35 percent.

Meanwhile, housing “starts” (under construction) jumped 14.5 percent in January of 2006. Permit approvals were up 6.8 percent. That old dawg, momentum. House “affordability” reached a 14-year low according the U.S. Department of Commerce; foreclosures are up 27 percent so far in 2006.

You wonder, finally, how many current homeowners will lose their houses? How many developers will lose the shirts off their backs? How many banks will get stuck with foreclosed property? And how will the United States economy function without a phony-baloney real estate bubble market driving it?


James Howard Kunstler
for The Daily Reckoning
March 22, 2006

Editor’s Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.

His latest nonfiction book, “The Long Emergency,” describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.

You can purchase your own copy here:

The Long Emergency

You can get more from James Howard Kunstler – including his artwork, information about his other novels, and his blog – at his Web site:


“Decadence…degeneracy…debt…frauds…numbskulls,” our friend Michel was probably speaking for thousands of dear, long-suffering Daily Reckoning readers.

“Don’t you ever have anything positive or upbeat to say?” asked Michel. He is a French intellectual, but that doesn’t mean he can’t tie his shoelaces. He still has a useful thought from time to time.

So, yes, dear reader, we do. We note that even a man who is half-dead is half-alive, and the grass grows greenest around the manure pile. Yes, Western civilization is in decline.But no, it doesn’t mean we can’t have a good time.

Do you remember our dictum:“Americans spend money they don’t have on things they don’t need and would probably be better off without?” We had in mind electronic gadgets, particularly big-screen TVs, and fancy automobiles. But colleague Lila Rajiva reminds us that it is not the gadgets that do the financial damage, it is the big-ticket items – expenses that are supposed to be beyond consumers’ control: housing, health care, education, transportation, energy and taxes.

“Home ownership getting tough for the working class,” signals a CNN/Money headline. “Atlanta gas prices + 40 cents in a month,” adds the local paper. “One quarter of Boston’s homeowners stretched,” says the Christian Science Monitor. Well, here is today’s cheerful news:even the big-ticket items can be greatly reduced – with no real loss in human happiness.

(More below…)

[Ed. Note: While the sticker price goes up, up, up in most cities, home prices are going down in reality. It’s only the beginning. Learn how you can protect yourself from the biggest one-year loss of wealth in world history…

The Appraisal Scandal

Meanwhile, the papers are all a-twitter with comments on Ben Bernanke’s speech to the Economics Club in New York. The new Fed chairman seems to have picked up his predecessor’s speaking skills; when he stopped talking the essential questions remained unanswered. Will he raise the benchmark rate? Or will he not?

The stakes are high. America is a country that lives on debt; we pay $3 billion in interest charges every day. Most families have no cushion of savings – nor do they have a “labor cushion.” The typical woman works as well as her husband. When times get tough, she cannot go “back” to work; she’s already working full time. So, when interest rates rise, something will have to go.

So, all eyes are on the Bank of Ben Bernanke. Our guess is that Bernanke believes what he says: that the economy is solid, and that only an old coot like Warren Buffett would have serious reservations about it. He also said he was not worried about an inverted yield curve. That too, he said, is an old-fashioned indicator not worth thinking about.Our guess is that he will confidently raise rates another quarter point and then, when he sees the economy crumbling, cut like mad.

Goldman Sachs estimates the amount taken out in home refinancings last year was $834 billion. Of that, 68% was used for discretionary spending – amounting to about $1 trillion over the last two years. Even with all this spending, according to economist Walter J. Williams, the economy shrank. What will happen when interest rates go up and the “refis” stop? You know what we think, dear reader, but we will tell you anyway. We think today’s low rates are based on a delusion. We think that history has come to a dead stop, that nothing bad will happen, and therefore, you don’t need any protection from it – either in the form of savings, or in the form of higher, just-in-case yields.

“The end of history…the beginning of nonsense,” said Maggie Thatcher, taking the words out of our mouths.

Over to Aussie Joel and The Rude Awakening…


Justice Litle continues his reporting from Lake Tahoe:

“For the patient investor, the ultimate payoff should come in the form of both accelerated earnings growth and a ‘perception premium’ that kicks in when Wall Street sees the beauty of ‘green is green.'”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening:

Green is Green, Part II

Back to Bill Bonner, and more good news…

*** Hmmmn. Robert Shiller, he of “Irrational Exuberance” fame, is backing a way to trade options on the housing market.

*** Yes, dear reader, you can save money – big money. You can live better, even as the U.S. Empire declines. The Exodus of power and money continues; the Experimental dollar collapses. The Economy turns down and the cost of Energy turns up.

Who really is better off for giving up a third of his income to taxes?

Anyone who reads the paper knows the money is wasted. The taxpayer might just as well waste it himself, but taxes are a special case. The world improvers and bullyboys will send you to the slammer if you don’t pony up your share. For every other big-ticket item, though, you can evade the cost without ending up in the company of stick-up men and drug dealers.

Take education, for example. One of our children has already graduated from college.Three are still in college. We have two more who will probably go to college in the next few years. Despite our familiarity with them, we are still shocked every time we get a tuition bill. One college just announced a hefty increase for next year. Another merely raises the rates without notice.

We wondered how other parents managed.

“Dad,” Jules explained to the chump he calls his father, “All the other kids have some form of scholarship or financial aid. Even if their families have a lot of money, they seem to all get something. We’re the only ones paying the full rate.”

Even with the loans and hustles, college is a crushing expense for many families. And what do they get for it? Unless the kid is in the sciences, applied or abstract, the answer is probably nothing. We looked around us. Of all the people we know, who would have been worse off if he had not gone to college? What did any of these people learn that was actually useful or uplifting? We can’t think of a single person…or a single thing. What was learned that wouldn’t have been learned better on the job? Or from reading books?Or from keeping your eyes open?

We don’t know. In our own career, we can’t think of anything we learned in school, after the 6th grade, that we couldn’t have learned on our own. Besides, most of it subsequently proved to be incorrect, misleading or irrelevant. Remember the line from the popular song: “When I think of all the things I learned in high school, it’s a wonder I can even think at all.” We cringe when we think of all our classes in government, economics, politics, sociology and history; it was as if they were all taught by Thomas L. Friedman, giving us an idealized, child’s notion of how things work. Even then, we thought there was something fishy about them, but imagine if we had stopped thinking at age 18. We’d be buying the Dow at 11,000…and voting for Hilary Clinton!

By our estimate, at least half of the spending on what is called “education” could be tossed out the window with no loss in real knowledge or brainpower.

And what about housing? People pay a lot more for housing than they used to, largely because they buy a lot more house. But, who was ever really made happier by a bigger house? Average house sizes have doubled since the 1950s. Almost everyone now has a formal dining room he doesn’t use, and lonely extra bedrooms for non-existent guests.

We are not ones to cast stones, for we have our own enormous pile of glass in France.Most of our rooms are seldom used. In fact, there are bedrooms that haven’t been entered for years. For all we know, the desiccated body of the last weekend guest is still there, lying in bed and waiting for a wake-up call. The main living room is used as a passageway; it might as well not be there. The family is afraid to go up in the attic; we hear strange sounds at night. We wonder what is going on up there. A tribe of gypsies could live up there; we would never know. All we get from this space is the expense of heating it to keep the pipes from bursting, and keeping it up.

Do you really need to spend a lot of money on a house? Far away and long, long ago – long enough for the statue of limitations to have run out – we decided to build an experimental house with our own two hands. We were young, strong, and sure we had a better idea than any that had come along in thousands of years of vernacular architecture.

The state of West Virginia was less sure; neither its building codes nor its zoning regulations would permit it. So, we sited the place in the woods where no one would see it, and we built it anyway. We tied rebar and wire mesh together to make a cage. Then we sprayed it with gunite, and covered the inside with plaster. Dirt was heaped up around, so that the place almost disappeared completely, but leaving open a large section facing the south. This was covered with glass, sloping down to the ground. The total cost: less than $20,000.

“Interesting…” was Elizabeth’s judgment on the greatest achievement of her husband’s life. But she didn’t want to live there. It did not accord with her idea of what a house should be, though your author was perfectly delighted with it. It was like no house he had ever seen. One great feature was that it needed almost no heat since the glass wall acted as a heat absorber, which was protected in summer by leafy, overhanging tree limbs.

Maria noticed the drawbacks: “Eeewww…there are bugs in it.” And so, after a brief spell, the family abandoned the experiment and returned to more conventional quarters.The house is still there; it needs no maintenance, no heat and no attention. The last we heard it had been rented to a man who has been happy there for many years.

More on how you can cut the big-ticket items down to size…tomorrow.

The Daily Reckoning