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."
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 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.
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.
There are probably people who like suburbs. Of course, there are people who like Barbra 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.
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.
July 23, 2002
Man oh man…today could be a very bad day in lower Manhattan.
"This could be it," said Dan Denning, who appeared on my doorstep this morning. "This could be the panic we’ve been waiting for."
Dan reminded me that the crash of "Black Monday" in ’87 occurred after a drop of 108 points the previous Friday.
The Dow fell 390 points on Friday (more details from Eric, below)…closing near its lows for the day. Investors sold steadily throughout the day but there was no panic. The trade deficit hit a record in May – $37 billion. And last week, mutual fund redemptions rose to $11.4 billion. And then, over the weekend, Worldcom became the biggest company to ever file for bankruptcy protection – twice the size of Enron, 4 times as big as Global Crossing.
And pity the poor foreign investor. Not only are his Dow stocks down 20-25% so far this year, he’s also down another 15% on the currency. The dollar dropped again on Friday. If you want a euro this morning, you’re going to have to pay $1.01 for it.
But we always look on the bright side here at the Daily Reckoning. All over the world the gap between the rich and poor is narrowing – as investors have lost a total of nearly $35 trillion dollars, says the Financial Times.
And thanks to investors’ faith in "stocks for the long haul," hardly a day passes that the rich in America don’t edge nearer to the poor…as the Dow continues its march to the vicinity of 5,000 or so.
Equities "haven’t been this cheap since the mid 1990s," says a Barron’s headline, helpfully. Barron’s and the rest of the financial press are doing Marx’s work – trying to ease the disparity between rich and poor by convincing rich investors to stay in the market until the bear has done his work.
So, Eric…what’s going down in downtown NYC?
Eric Fry, reporting from Manhattan:
– Okay folks, fasten your seat belts and get ready for a wild ride. The week ahead promises to be an exciting one on Wall Street. Will stocks rise or will they fall?…A nation of terrified investors is almost too afraid to ask.
– "Mondays following Friday declines have always been difficult and I suspect tomorrow will be no different," Richard Grasso, head of the New York Stock Exchange told NBC’s "Meet the Press."
– Fear has clearly overtaken greed on Wall Street…at least by a nose. The legions of bubble-era "buy-and- hold" investors have become bear market "run-and-hide" investors. In fact, many of the very same folks who could think of no good reason to sell stocks when they were going up every day, can think of no good reason NOT to sell them now that they trade for less than half their peak prices.
– Not even the "safe" stocks are safe these days. Gold stocks slumped last week, for example, despite a strong rally in the metal itself. Other heretofore-safe stocks like Pfizer and Johnson & Johnson lost 17% each last week, while retailing icon Wal-Mart slipped 12%. But these struggling blue chips had plenty of company.
– Barron’s provides the grim recap: "With a 390-point collapse on heavy trading volume Friday, the Dow Jones Industrial Average lost 665 points, or 7.6%, on the week to settle at 8,019, decisively below both its September closing low of 8,235 and even well under that month’s intraday low of 8,062. The index, the last of the major benchmarks to puncture its September nadir, has disgorged 1,360 points in the past two weeks, a 14.5% decline that ranks among the steepest two-week tumbles in history…The Standard & Poor’s 500 index retreated 8%, to 847, 12% below its September low."
– Investors wanted nothing whatsoever to do with stocks last week. AMG Data Services reports that investors sold a net $11.4 billion worth of equity mutual funds in the week ended Wednesday, adding to the previous week’s outflows of $2.4 billion. This sizeable selling by mutual fund investors is almost certainly contributing to the declines on Wall Street. As mutual fund investors redeem their shares, the fund managers are forced to raise cash by selling stocks.
– Thus, a vicious cycle is born…
– "The speed of the market’s decline has been truly breathtaking," notes MSNBC. "Of the $7.7 trillion in market value lost since the bear market began nearly 28 months ago, $1.5 trillion, or nearly 20 percent, evaporated in just the past two weeks."
– Responding to the devastation, T-bonds and gold both continue to climb. The rally in Treasuries has pushed the yield on the 10-year bond down to 4.51%, or nearly a full percentage point lower than when optimism about the economy peaked – appropriately – on April Fool’s Day.
– Gold jumped $8.30 last week to $323.90 per ounce.
– Even for the bears, it’s somewhat hard to believe that the Standard & Poor’s 500 index is down 26% this year and has fallen a breathtaking 44% from its 2000 peak. That’s nearly as bad as the 48% the index dropped during the infamous decline of 1973-1974. The Nasdaq is off 32% this year and has collapsed 74% from its March 2000 high of 5048.
– The bulls would like to know if it will ever again be safe to buy. Stocks are certainly cheaper than they were, even if they are not quite back-up-the-truck cheap. The Dow sells for about 16 times projected 2002 earnings. That may be inexpensive enough to inspire a decent trading rally. But the start of a brand new bull market may have to wait until stocks are cheaper still…In other words, the bear market may still have a bit of work to do.
– But even if stocks keep falling, investors shouldn’t fret or furrow their brows, says Richard Grasso, the head of the NYSE. Just because investors are a few trillion dollars poorer than they used to be doesn’t mean they should panic.
– Instead, the head of the New York Stock Exchange urges investors to stay calm and focus on the wisdom of long- term investing…whatever that is.
Back in Paris…
*** "America is not needed anymore, Jean-Claude told us."
*** Elizabeth was reporting the conversation over lunch with a pundit from Le Monde.
*** "Jean-Claude is a fool," I thought to myself, "a big-mouth numbskull."
*** Le Monde is to Paris what the Post is to Washington – a newspaper which takes geo-politics, and itself, seriously.
*** "He thinks the rise of the euro means that the dollar, and America itself, are yesterday’s news. Europe no longer needs U.S. money, nor U.S. military protection."
*** What Europe has needed from North America has been willing consumers. U.S. consumers are still the buyers- of-last resort for the entire world. They’re still willing to buy goods from the rest of the world – as May’s trade deficit demonstrates. Too bad they can’t afford to pay for them.
*** Russia is no longer a threat to Europe. The only military threat is terrorism. But many Europeans – and your editor – believe Bush’s heavy-handed War Against Terrorism (WAT) actually makes the situation worse.
*** "The market must be at its bottom now," said a young man who came over for lunch on Sunday. The Frenchman works for IBM in Paris. He’s persuaded himself that the worst is behind us. "Friday’s selling seems to finally have brought the market down to good levels. It should go up from here," he advised.
*** "What do you think?" he made the mistake of asking me.
*** "I think Bush was right about ‘infectious greed’," I began. "The world has become a little sick – obsessed with stocks and with money…even after a 30% – 40% drop people are still watching the Dow and the CAC wondering when they will start back up.
"Looking at it differently, it wasn’t just a few companies that were lying to investors…it was the whole society – lying to itself about how rich it was, how productive, how smart…and about how all the money it was making made them all, somehow, better people. In the 1990s, the whole world – but especially America – started keeping score in dollars. People just checked their portfolio statements…or the latest sale price of a house in their neighborhood…and they thought that was all that mattered.
"What curse would the Gods put upon such people? That they would lose the thing that matters most to them – their money.
"Someday, this too shall pass," I continued. "But not until investors’ expectations have been so thoroughly disappointed that they no longer care when the Dow begins to rise. The process could take years.
"But, of course, I’m just guessing."
*** Tell Steven we say hi.