Conventional authorities admit to land’s role in recession
They note before and after but do not explain how it got so bad
| Some well-funded economists with relevant data at their fingertips underscore the inevitably of recession following “real estate” bubbles but leave out the obvious; once land soaks up all available fiscal capital, there’s nothing left for anybody to invest and economies go dormant until land prices fall back down within reach of a critical mass of buyers. We trim, blend, and append seven 2008 articles from: (1) CFO Magazine of June 1 by Edward Teach; (2) MarketWatch of Oct 17 by Rex Nutting; (3) MW of Oct 23 by Nutting; (4) AP of Oct 23; (5) AP of Oct 28; (6) Reuters of Oct 28; and (7) the Dayton (Ohio) Daily News of Oct 22. |
by Jeffery J. Smith, October 2008
CFO Magazine: There are parallels between the present and 18 earlier postwar banking crises in industrialized countries: the huge run-up in housing and equity prices and the acceleration of capital inflows even prior to the subprime crisis. Other researchers at the International Monetary Fund defined a housing-price bust as a drop in prices of more than 14 percent, compared with 37 percent for equity crashes. They found 20 such busts in 14 industrial countries between 1970 (when housing-price indices generally start) and 2002. The housing-price busts tended to coincide with recessions and were often synchronized across countries. They were fewer and farther between than equity-price busts, but they lasted longer -- four years on average, compared with two and a half years for equity-price busts. The average price correction was 30 percent. This suggests that U.S. housing prices have a lot more room to fall, with the bottom not reached until 2010.JJS: Prices follow demand and supply. Demand is still falling, as shown by housing starts. Supply is still rising, as foreclosed homes come on the market. Then, true to form, prices keep falling, too -- until affordability is reached.
MarketWatch: Construction of new homes dwindled to the second-lowest level in 50 years last month, falling 6.3% in September. Starts in particular of single-family homes tumbled 12% to an annual rate of 544,000, the lowest since February 1982 and the fourth-lowest ever. Housing starts were off 31% in the past year and were down 64% from the peak in early 2006. Building permits fell 8.3% to 786,000 last month, a 27-year low. Permits for single-family houses dropped 3.8% to 532,000, the lowest in 26 years. In the past year, permits for single-family homes have dropped 39%, single-family starts have fallen 42%, and single-family completions have sunk 27%.
MarketWatch: U.S. home prices fell 0.6% in August and 5.9% in the past year, according to the Federal Housing Finance Agency, successor to the Office of Federal Housing Enterprise Oversight. The August decline in the FHFA index was less than the 0.8% drop in July. Home prices have now fallen 6.5% from the peak.
AP: The number of homeowners in foreclosure grew by more than 70 percent in the third quarter of this year compared with the same period in 2007. By the end of the year, RealtyTrac expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.
AP: The Standard & Poor's/Case-Shiller 20-city housing index dropped a record 16.6 percent from August last year, the largest drop since its inception in 2000. The 10-city index plunged 17.7 percent, its biggest decline in its 21-year history.
Both indices have recorded year-over-year declines for 20 consecutive month. Prices in the 20-city index have plummeted more than 20 percent since peaking in July 2006. The 10-city index has fallen nearly 22 percent since its peak in June 2006.
JJS: While the above indicators are objective sales figures, however massaged, the next indicator is a subjective feeling. We’d rather have hard numbers for society’s total spending for land and resources, but we must work with figures given by the powers that be, however useful or not -- at least it’s another record.
Reuters: U.S. consumer confidence plunged to the lowest in one survey's 40-year history October as workers faced job losses and saw retirement savings evaporate during Wall Street's astounding 25 percent plunge this month.
JJS: Even as residential sites lose value, agricultural land gains value, thanks to humanity’s growing appetite for transportable food and to government subsidies to agri-business and transportation. But when recession brings low the price of commodities, the farm sector’s turn will come.
Dayton (Ohio) Daily News: Grain farmers are having some of their most profitable years in a generation. Now landlords who rent cropland to those farmers want their cut. Of Ohio's 14.6 million acres in farms, about 44 percent are rented or leased from landlords.
Even though farmers have higher input costs, there's still very good profitability in the industry. Top cropland yields more than 185 bushels per acre of corn and more than 60 bushels per acre of soybeans. Top cropland in southwest Ohio was expected to have an average value of more than $5,200 per acre this year. At 2 percent, rent would be $104 per acre; at 4 percent, rent would be $208 per acre. Average rent per acre for top cropland in southwest Ohio is estimated to be $175 this year, up 12 percent from $156 in 2007.
In a few cases, aggressive farmers are approaching landlords about renting ground that's traditionally been farmed by others, creating competition and helping to spur higher rent rates. And more landlords are seeking the highest rent through sealed bid. Landlords are more apt to raise rent during good times than to lower them during bad times.
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Jeffery J. Smith runs the Forum on Geonomics.
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Also see: In response to the "Strike Two!" editorial
Property bubble leads to crash landing
1929 Redux: Heading for a Crash? |
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