Suburbia Delenda Est

“It was the flight to suburbia [after 1929] that smashed land values in the big cities. That mighty blow to the economic centers of the country helped to bring on the Great Depression.”
– Jack Lessinger

A few months ago a friend, keeping me abreast of the hometown news, sent a clipping.

“La Plata Destroyed by Tornado,” said the news article. The accompanying photograph showed several buildings leveled…with bits of vinyl siding scattered on the ground and fiberglass insulation hanging from a surviving tree as though it was Spanish moss.

The report told how 3 or 4 people were killed when a twister let loose and went through the Southern Maryland town.

“Small price to pay to rid the world of La Plata,” your editor thought to himself. Even the debris was embarrassing. A decent building would have yielded at least a pile of bricks or stone. This stuff was so light the cyclone must have ripped it apart like a child opening a birthday present and carried it across the bay. They’re probably still finds bits of aluminum siding and quarter- inch plywood over on the Eastern shore.

La Plata, Maryland: In Came the Shopping Malls

La Plata was once a fairly decent little burg. Your correspondent recalls his first summer job. Working for a building contractor, he was given 5 minutes instruction and put to work painting the new bank in the center of town. As the white paint dripped down his arm, he felt a little pride in having gainful employment and on contributing to a handsome building – for the bank was built on the colonial theme, out of brick with white trim (and the occasional serendipitous splash of white paint on red brick, courtesy of your editor).

Years later, Route 5 coming out of Washington was widened, and in came the commuters, the shopping malls, auto dealers, and almost every imaginable commerce that a man can put a price behind and parking lot in front of. Hamburgers, pizza, Chinese takeout, tacos…muffler replacement, tires, lubrication…once the division of labor took hold, there seemed no stopping it. You had only to drive along in the far right lane, keep your eyes open…and anything you might want would soon appear, advertised on a billboard. And so convenient!

European cities are different from Americans ones: people want to live in them.

Prices in Paris have risen sharply in the last 5 years. A one-bedroom apartment of just 500 square feet sells for $300,000. The closer to the center of town, the higher the price. And no wonder, in the center of European towns, you find good restaurants, movies, bars, clubs, museums – sidewalk cafes and street life. At 6PM on a Friday afternoon, when the weather is good, a person can scarcely find an empty chair at the Paradis across from our office.

La Plata, Maryland: Deserted Cities

By contrast, downtown Washington, at the vesper hour, is deserted.

With a few exceptions, American cities are not places people choose to live. They wouldn’t choose to park their cars downtown either, but it is a necessity. And as soon as working hours are over, they get in their cars after work, roll up the windows, and get on the freeway. But instead of heading to some paradise beyond the city walls, the poor hapless commuter spends an hour in traffic to get nowhere. Driving down Route 5 to La Plata, Maryland, for example, he finds no museums, no cafes, no decent bars, no restaurants with a chef, no charm, nothing but a wasteland of strip malls and insipid houses tracked across the landscape like cogs in a zipper.

Nor are there any public fountains, gardens, grand avenues, parks worthy of the name…no history…and here we offer a guess: no future. Nothing but a desolation of parking lots and forlorn residential cul de sacs where the trees have been cut down so the streets could be named after them. On Dogwood Lane the houses are butted up against one another so a man risks splashing his neighbors when he washes his car. And over on Maple View Drive the neo-plantation style houses begin at $499,000, believe it or not. For the price, you get all the latest popular conveniences – water jets in the bathtubs, cable and alarm wiring, in-ground pool, 3 car garage, decks with barbecue and Jacuzzi, and heck, maybe even a family dog. Just hope that no tornado whips up and blows it all away.

It’s the windows that bother us most. They stick the $499,000 house out in the middle of a tobacco field without even a locust tree for shade…and then nail the vinyl shutters to the wall. You’d think for that kind of money you’d get decent windows you could open…and decent shutters you could close. But shutters went out of fashion in America before WWII. Since then, people just turn up the air-conditioning, draw the blinds, and turn on the TV.

La Plata, Maryland: A Necessary Evil

There are probably people who like suburbs. Of course, there are people who like Barbara Streisand and sumo wrestling. Most people look at the suburbs as a necessary evil – like taxes, except that it is an evil they plan to escape…after the kids have left home and their retirements have begun.

Therein hangs a tale, we believe. For suburban real estate represents the number one item on American’s balance sheets – and also their biggest liability. “Real estate loans anchor our whole economy,” writes Jack Lessinger, an economist who specializes in real estate patterns. “In the event of a large and permanent collapse in real-estate values, property owners default on their mortgages, banks and other lenders go belly up, depositors aren’t able to pay their bills, production and consumption slow down, unemployment rises and government is helpless because bailouts would be too expensive.”

As America’s love affair with stocks began to turn a little sour, investors slouched back to their homes…and looked upon them with new favor. Every passing day, the stock market seemed to get older and uglier. But the real estate market never looked finer…for every dollar their equities had lost, their homes seemed to gain one – or almost. In the last five years, stocks rose by $6 trillion…and then gave the money back. The real estate market gained about $5 trillion and still has it in its pocket.

And Greenspan’s low rates made it possible for a homeowner to borrow out some of his “equity”…and still end up with lower monthly payments. The consumer not only did himself a favor by buying a new house – or refinancing an old one – he gave a boost to the entire economy. And Greenspan applauded his efforts on national TV!

Houses, like automobiles, are considered “durable” goods. They are meant to last. Automobiles lose value at a notoriously fast speed. Until now, houses have generally increased in price. Nothing says they have to; suburban housing prices, in particular, may prove much less durable than people expect.

Lessinger believes the next major phenomenon in the real estate market will be the collapse of the suburbs.

La Plata, Maryland: Suburban Real Estate Crash

America’s baby boomers are not just getting older and more desperate, says Lessinger, they are also changing their minds about what they want:

“Suburbia is no longer the centerfold of the American Dream…” The boomers want “something quite different,” he continues, “life in a small, friendly community far from congested freeways – a village in the midst of natural and unpolluted open space. And since 9-11 there’s another factor: Dense metro areas make inviting targets for terrorists. As people are increasingly anxious to leave, the demand for suburban real estate is leaking away. When that leak becomes a flood…expect a crash.”

In the early 1900s, one of the surest investments one could have made was in America’s large cities. Rural populations migrated to urban areas to find work…and escape boring lives in hick towns. But by the 1920’s a new trend was already underway – the big cities were filling up with Blacks and Catholics, so those who could afford to were moving out of the center of town to close-in suburbs. The market break in ’29 marked the end, not just of an mania for stocks, but also of in- town property prices. Cities such as Baltimore, St. Louis and Philadelphia hit their peaks around ’29 – and never recovered.

Likewise, Lessinger believes the current bear market on Wall Street will take suburban property prices down with it, permanently. Trendy, fashionable, wealthy people will never again want to live in the suburbs. Which is not to say that the suburbs will be destroyed like La Plata. That is more than we could hope for.

Your editor,

Bill Bonner
July 22, 2003


“When will we be there?”

The question was for John Mauldin, who was visiting over the weekend. Neither of us doubts that the Dollar Standard period will someday come to an end. Everything does.

But when?

For the moment, we are “muddling through,” says John. When do we stop muddling, we wanted to know?

Here at the Daily Reckoning, we sit on the edge of our chair. We are such optimists; we can’t help but think that a sort of economic rapture is at hand. Surely, this mess will be sorted out soon, we feel; at long last, people will get what they’ve got coming.

Bonds fell sharply again yesterday. Is this the beginning of The End of the World? Or is it merely the end of the beginning? Or maybe it is nothing at all…but merely another feint by Mr. Bear…just to keep the muddlers on their toes.

The real value of U.S. bonds will eventually be discovered. Investors have been lending dollars to the world’s biggest debtor at negligible yields, while Ben Bernanke and the Fed crew promise to make those dollars worth considerably less when they get them back. There is smart money, dear reader. There is dumb money. And there is money so imbecilic that it cries out for euthanasia. So far, Mr. Bear has just been playing with the switch. But sooner or later, he will pull the plug on the bond market.

In the meantime, of course, we muddle through…

[See John Mauldin’s article on the DR website: ““]

“Can Americans save enough for retirement?” asks the Kansas City Star. Putting the question to a financial planner from McLean, Virginia, they get this soft-headed reply:

“Americans nearing retirement not only need to step up their savings significantly, they also have to overcome the fears instilled by the 1999-2001 market decline and get back into stocks and other investments with better rates of return, Glassman said.”

Ah…that is the trouble with muddling through. It assumes that things just continue in the same direction, indefinitely. Mr. Glassman is so accustomed to stock market gains, he cannot imagine that the 1999-2001 decline was anything more than a temporary setback. The baby boomers have spent their entire lives in the Dollar Standard period…they can’t imagine that the dollar would ever be rejected. Nor can they imagine that their retirements will be any more difficult than their parents’ and grandparents’. ‘Pop and Grandpappy muddled through their retirement,’ they say to themselves. ‘Worst case, so will I.’

But Grandpappy lived through the Depression. He had no debts and kept a few chickens in the backyard. And Pop had paid off his mortgage long before he retired.

A free, solvent man can muddle through for a long time. A man deep in debt, on the other hand, cannot permit himself the luxury.

And now, Eric, with the latest news:


Eric Fry on Wall Street…

– Yikes!…Watch out for falling bonds! U.S. Treasuries tumbled again yesterday – falling for a fifth day in six and driving the yield on the 10-year note to its highest level in four months. The stock market also fell, as the Dow dropped 91 points to 9,096 and the Nasdaq retreated 1.6% to 1,681. But gold perked up a bit, as the yellow metal added $3.70 to $351 an ounce, its highest level since July 3.

– Suddenly, the financial markets aren’t looking so chipper. We were never persuaded that the stock and bond markets should have been rallying in the first place. But a few million investors saw it differently. The problem was, and is, that even after a three-year skid, stocks are pricey. Bonds look even riskier than stocks by offering, as they do, return-free risk.

– And now the risks are becoming apparent. Across the entire yield curve, bond prices are cascading from the heavenly heights they reached early last month…which means that bond yields are soaring.

– The swift, perpendicular ascent of bond yields is truly breathtaking. The yield on the 10-year Treasury, for example, has soared from 3.07% in early June to 4.17% yesterday. That’s a stunning 110 basis points in little more than a month. You don’t see that every day. According to Bank One Capital Chief Economist Anthony Chan, the 10- year yield has risen by at least 100 basis points over a period of six months just eight times in the last four decades.

– Yesterday was a day for round numbers in the bond market. For the first time in several months, the 30-year T-bond yield jumped above 5%, the 10-year yield soared above 4% and the 5-year yield pierced through 3%. In short, rates are rising…swiftly.

– Your New York editor has encountered no estimates about the size of the investment losses resulting from the bond market’s swift sell-off, but he would expect them to be rather large. PIMCO’s long-term government bond fund, for example, has tumbled about 10% in the last six weeks. That’s probably not the sort of “safe” and “steady” return that most bond fund investors were expecting when they sought refuge from the “volatile” stock market.

– Your New York editor has made no secret of his contempt for the bond market – actually, more fear than contempt – which is why he has referred to the bond market previously in the Daily Reckoning as the “single best short sale in any financial market.” Okay, maybe he exaggerates a bit. But certainly, bonds have not been a terrific thing to own over the last few months. And it does not seem likely that bonds will be a rewarding investment over the next few months, either…or even over the next few years! Most likely, the bond market is – like a hornet’s nest – better avoided than embraced.

– Foremost among the bond market’s myriad challenges is the swelling Federal deficit. Washington’s half-a-trillion- dollar annual budget shortfall is certain to boost “supply” in the Treasury market. Uncle Sam will likely hawk another $60 billion worth of IOUs over the next three months alone. At what price for the government’s 10-year bonds? A 4% yield? 5%? 10? Who knows?

– “Federal Reserve Chairman Alan Greenspan hasn’t used ‘bubble’ and ‘bond’ in the same sentence,” Bloomberg News observes. Maybe he should. Heaven knows we’ve been linking those two words often enough in the Daily Reckoning.

– Nevertheless, let’s try to be patient with the Chairman. Perhaps he will do so when he is testifying before Congress that he could not possibly have recognized the bond bubble while it was growing and that even if he had, he could not possibly have prevented the bond bubble from occurring.

– In the meantime, we wonder how many more days will pass before we see the words “bubble” and “Greenspan’s reputation” in the same sentence.


Bill Bonner, back in Paris…

*** When will The End come? Your editor and John Mauldin muddled through several bottles of wine, but never reached a conclusion. Japan has been in a long, slow-motion fall for 13 years…muddling through an 80% stock market correction, a 50% real estate collapse, on-again, off-again recessions, and deflation. Then again, the Japanese were net creditors when they began, not net debtors. They could afford a slump.

*** As Eric points out, Gold rose back above $350 yesterday. Our advice has been to buy whenever it falls below $350.

*** And here cometh another gritty little irritation to the Land of the Once-Free: the French magazine, Alternatives Economiques, reports that income, wealth and inheritance taxes in socialist France, as a percentage of GDP, are actually lower than they are in the U.S. In France, these taxes come to 11.7% of GDP, “which is 1.7% less than the European average, 3.8% less than in Britain, and 1.1% less than the United States.”

Note, these figures do not include social welfare charges or sales taxes…which are very high in Europe, generally regressive, and hard to compare with the U.S.

*** “Wonderful wonderful wonderful…you propel me into self-salvation,” writes a Daily Reckoning reader. Do we detect a touch of irony?

“Today I had a garage sale…emptying my closets and bookshelves and cabinets and garage of my surplus of stuff…my wife and I have sold our house and taking our profits and are now downsizing into an LA condo (we still have work/business needs here)…and starting the Two Years To Being In France Plan (or maybe down the road in Italy…but I lean toward France). By then the French economy ought to be as bad as ours and I’ll be ready to pounce and it won’t matter too much what paper money I offer, everyone will be desperate to grab it. Paris or Nice…which ever gives me the most bang for the the the…gold. I’m already teaching my favorite cat (three legs, black, Marcello) to meow and understand French and how to pose like an existentialist. The only thing left to do…and I’ll wait until the last minute…is to confess to my wife that once we cross the ocean, it will be very hard to get me back.”

The Daily Reckoning