The McMansions Which Ate Your Job

"The McMansions Which Ate Your Job"
PRESS RELEASE Citizens for Corporate Accountability

-No “economic mystery”--no need to create jobs, when easy credit is much quicker
-GOP departures, fines, and Greenspan comments spell deep trouble for mortgages
-Risk extends to FDIC banks, according to March report

(SEATTLE) 03/05/04 - Once again, net job growth in the US economy is negative, even while a record number of workers are already unemployed (1). Once again, the administration quotes record GDP growth--which occurred without job growth. All this confusion leads to a number of economists scratching their heads, some stating the economy is in “uncharted territory.”

Indeed.

But there is absolutely no mystery as to what is going on, if economists would simply study economic statistics, and the micro-economies which led to recent jobless GDP growth. Namely, aside from a short-term boost in high tech purchases, most of the cited GDP growth is tied directly or indirectly to a cycle related to home prices, and an unprecedented, quick and easy credit supply related to homes.

Let’s not forget, that the current ultra-low interest environment is more or less an “experiment”--which in practice, is leading to a bizarre cornucopia of credit.

Such an endless credit cycle would seem impossible--after all, who would underwrite a bottomless pit of credit, where houses go up nearly 20 percent annualized, and people borrow against them, even while jobs to pay for the same don’t develop?

The answer is, for all “sound” intents and purposes, that “no one” would do this. No one, that is, who is actually running a sound balance sheet with adequate and diverse reserves. However, in this particular case, the “no one” goes by the name of mortgage giants Fannie Mae and Freddie Mac, who are systematically picking up and packaging mortgages, and increasingly, holding onto them, regardless of home price or risk. (2) (3)

Maybe economists are politically oblivious. But they certainly must have noticed a succession of scandals and departures surrounding Fannie and Freddie--the departure of a Bush cabinet member who had oversight, and now a major lobbyist? And what of the number of fines recently related to improper GOP donations?

In this “new, new” economy, it’s much quicker, and more “productive” to borrow against ever-larger homes, than to support an economy which requires actual workers and wages. Fannie Mae, the homebuilders, and GOP supporters make sure 25K chunks are available with a few points and clicks--or at least, the ones who haven’t departed, and are still cashing in.

You see, it was not without reason that a normally upbeat and very Republican Greenspan warned recently about debt growth at Fannie Mae and Freddie Mac. There is no mystery at hand. Next time you hear the GOP touting GDP growth without jobs, remember that such is a symptom of something gone horribly awry--a mortgage system turned into a dark beast, which serves as a quick surrogate for jobs, and according to Greenspan, is surely headed for trouble.

### Footnotes ###

(1) Job growth of 140-150K is needed just to cover new workers, hence, any number below that level adds new unemployed to the already record base. (2) This arrangement benefits Fannie and Freddie shareholders, and even more so, various homebuilders, who find they can raise prices eternally, with no risk to them. (3) According to a March 2004 report, a number of FDIC banks have been accumulating Fannie/Freddie mortgage securities as “first tier” holdings--even though there is no real backing.

[tigereye]

1. my brother who works for a lawn care business

says that these houses are mostly empty, because no one can afford furniture to put in them. Where do these people get all this money to buy them? What a waste. I have a nice reasonable little 100 year old house and I like it just fine.

[KoKo]

3. It's true! The furniture is gross. You have to look at the sub Mc's

where I am to see real furniture and good looking window treatments. These are "vanity houses" where the folks who move in just buy the shell for looks and get a leather couch from "Rooms to Go" and a couple of beds for the kids and they consider it done.

It's quite odd.

[tigereye]

4. i find it sickening,,, it drives up prices for people who

want a reasonably priced house... when we got our mortgage, the broker said we actually lived within our means ( well we did before we had a kid) as if this were very unusual.

6. Fannie Mae

They just buy the mortgage, after their friends at the builders set a higher price.

[Warpy]

8. I know people like that

They've been sold on real estate as an investment as well a a tax shelter. They're living in big empty rooms mortgaged to the hilt, and are planning to buy an even more grandiose heap of masonry next year. Meanwhile, they have little furniture, resin chairs in the living room etc. and clothe the kiddies on the credit cards, which they keep getting higher limits on, plus shiny new SUVs that they eithe lease or owe the maximum on.

This is where the next big depression is coming from, folks, so hold on to your hats.

[KoKo]

2. Excellent Dan! Great Post! This is true! Living in a "McMansion" boom

area.....you've struck a cord in my heart that this is something we need to focus on, and even those DU'ers who get "turned off" by McMansion talk, need to understand how this affects them!

:toast:

5. Recent reports

Thanks!

Show that demand for building supplies is so huge, it is creating inflation pressure on other possible business. Check out the beige book report on my website.

7. Kerry needs to address this NOW

If not, it will collapse on his watch!!!!

[kalian]

9. Its designed to collapse on his watch....

DUH! :eyes:

[rfkrocks]

10. Also Demographics

Our population is not really growing so how can the home building industry keep going? The baby boomers should all have their homes (those that are still employed) so shouldn't supply and demand start driving prices down? Where are these buyers coming from? Shouldn't prices start to fall? Excellent post and thanks to all the economics majors that explain this world to me!

13. Statistics show several trends

Less people, in bigger houses--up to the point of retirement, then smaller cheaper houses.

There are a few reports linked into my site.

I personally think what is driving the prices up now is the home builders are in acquisition mode and gaining monopoly power, while at the same time, Fannie wants to grow its own size. Hence, the builders raise size and prices, and Fannie just buys off.

I think Greenspan noticed this too recently, and that explains his stern talk.

And then come the huge GDP numbers for Bushie. My understanding is that "high" productivity numbers also play in here. In that productivity related to the building of new houses goes up in a ratio directly proportional to price. That's because any deflator factors in "owners equivalent" instead of actual home price.

In other words, if I build one house in 2003 that sells for 100,000, if I do the exact same thing next year on another house, and sell it for 110,000, both GDP and productivity will go up ten percent! (This is a simplified example)

Serves everyone well, no?

Meanwhile, then GOP is making sure it all happens, except they recently got caught for illegal donations to Fannie. And the main GOP lobbyist went fleeing a few days ago, and Bush's cabinet man resigned a few weeks ago.

I think I am the only one following the whole thing. Just like on the voting thing last year, until Bev Harris and I got together.

[rapier]

11. notes

Greenspan, the duplicitous bastard, was in a sense the author of the GSE explosion. For him to 'warn' agasint them was absurd. They are the non bank mechanism which he pretends he doesn't see as the real credit/liquidity engine which he as relied upon to keep things steady during the troubled times. A during the first Mexican crisis, then LTCM and the Asian crisis, then the partial stock bubble deflation.

He knows the GSE's were the monster engine of credit creation outside the conventional one which have made him look like the Maestro. Or he better know it because the absense of that knowlege would reveal him to be stupid in the extreme.

12. Dr. Greenspan is like

Dr. Frankenstein--at some point, he knew he created a monster.

Have you looked at the recent report on FDIC exposure to GSEs? I had no idea it had gone this far.

14. UPDATED on my website

with links

[rapier]

15. notes

Please familarize yourself with the weekly Credit Bubble Bulletin by Doug Noland from the Prudent Bear website.

http://www.prudentbear.com/archive_home_com.asp?category=18


The website itself is mostly non political but if one wanders into the message board one will find a good smattering of wingnuts. Such is almost always the case on bear sites. Ignore it.

The site is sponsored by a confirmed bear, David Tice, who has a self interest in seeing the bear case proven correct. That is not to say he is wrong but rigorous disclosure of such, which is ALWAYS absent from the touts who dominate the media should always be made obvious.

Mr. Nolands started the Bulletin in 99 and has been a voice in the wilderness on the issues of the GSE's. One does not have to agree with any of his analysis for it to be invaluable. The questions he raises will undoubtably change the way one looks at the credit and financial markets.

Back to the political realm. The Bulletin is also non political. For the most part these issues are non partisan in so far as there is NO active political alternative to Greenspan or the Wall Street pardigm. I hope that makes some sense to you. They could be political but there is no political opposition.

The sort of Nader analysis saying both parties are the same has a core of truth in it insofar as Democratic leadership on all levels has been captured by the financial elite. A little tweak to taxes here and a small addition to regulation there will do nothing to change the status quo.

At this point there never will be one unless there is a profound financial dislocation and a resultant economic problem which affects millions. By then it will probably be too late unless, and this is a tiny chance;, unless someone or many someones start to be loud active critics of the status quo and gain some recognition as Cassandras. Such is a thankless job but if the bad comes to pass they will instantly have enourmous cred which will be an antidote to what I fear will be a wave or repression to keep the emergent oligarchy safe and in charge.