The Hard Truth of the Matter
The Hard Truth of the Matter

Homeownership as the important contribution to the American dream has always been favorable to far more people than buyers alone. Let me explain that statement. All the way up and down the line of state, county and city employees and government, the American dream has always meant another thing besides homeownership: federal funding.

And as long as property values kept rising, it meant more and more funding‚ nicer facilities, better libraries, more police and fire rescue funding, better roads. In addition many of these improvements were part of a long year planning. But then…disaster hit and property values started declining as the initial result of a continuing crisis with mortgage payments leading to decreased local revenues from real estate and other areas.

Now before I continue to point at where we are in this spiral down development I need to clarify something first. Increasingly readers comment that we should look at things a bit more optimistic; that this is just another hurdle on the road of a young nation and that we will overcome. And you know what…I believe they’re right. We will overcome…but only if we realize and accept now the severity of what went wrong and the ongoing domino effects that we are facing daily. Sticking our collective heads in the sand and waiting for the world to turn back into a credit driven rose garden is not going to do the trick. And I’m saying that because I’m getting exhausted from trying to explain that the bottom will not be reached until the economy has performed due diligence, which is to say, has wiped out all the excess that was created during 25 years of living on credit.

So here is what will happen next:

State and local governments everywhere are now desperately strapped for cash. Logically municipalities with the worst drops in housing prices are strained the most. Maybe not yet here on Amelia Island as much as for example Ft. Meyers, but the effects are starting to show. Just think about the ongoing struggle in the area of law enforcement we are witnessing right here in Nassau County.

The next drop is going to be the commercial real estate market, because as people get evicted or leave their “underwater” home, more commercial properties in the neighborhood stripmalls will start closing, while many newly constructed ones will stay empty.

But wait, according to the latest economic data, housing markets are stabilizing (what they mean to get across is that our world is collapsing at a lower rate than several months ago). Prices have stopped falling, is the rally cry of the Spin Doctors or are even back on the rise in some places, even though nobody points to where exactly and more importantly why. They also claim that “smart” money is going in, scooping up cash-flow positive rental properties. Hold on, wait a minute here! Smart money? Seems more like idiot money if you realize that by far, most of the housing sales activity is on the low end of the market… and initiated by first time homebuyers. McMansions are not getting any breaks and those are the ones that used to fill the coffers of local and state governments.

Call it deflation or market forces but in states where the population is in decline‚ like California and Florida‚ replacement value of real estate will ultimately and inevitably fall. It’s the law of gravity in economics. And we all know that gravity sucks. Less demand, more supply, prices drop. No matter what incentives are being offered in the low end of the market. That means we could see a long-term, structural shift in the housing markets in those states. After all, fewer homes will be needed for smaller future populations. No other way to say it, but this means the folks buying in these days with their first-time home buyer credit ($8,000) or low down payment FHA loans (3.5%) are just the latest round of suckers in a Ponzi scheme to again help fund state and local government.

I’m neither political, a fan of financial science fiction nor a pessimist. I’m an economist who doesn’t believe in rose colored glasses. We are collectively not going to escape financial pain. Period. Governments will face “mandatory” shrinkage on virtual all levels. Public projects will be halted, postponed or scrapped and companies and contractors will face the hardship of unexpected drops in revenues and profits.

And way down on that ladder are the “helpless” non-profits and charities who are now becoming double punch victims of an economy that is much more depressed than the government seems to want to admit. Economic pain is still in our future, which does not mean that on a different level of prosperity we should not start building a better economy. All it takes is the willpower to do so.

Johan Ramakers PhD. Econ

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