While I’m not a graduate in economics from some Keynesian School of Business, I do make my living trading the equity markets and as such I get bombarded with all the economic and political analysis regarding the so-called sub prime lending crisis. So far, I have seen nothing that explains what is going on in any real world, common sense terms.
If the chicken little’s on the TV and radio were even remotely accurate about the impending global depression they claim we are facing, the market would already be down 50% or more since this story first surfaced back in February. There are too many well connected people managing billions of dollars that wouldn’t just sit on their hands and let their wealth fade into the sunset. In fact Warren Buffet has recently started buying up stocks in certain pharmaceutical and railroad companies.
So what’s to explain the problem? How about simple math? I will explain the mathematics of what is happening and use two real life examples to demonstrate the evidence of why I’m right.
We all know that the baby boomers are retiring and have been retiring at an increasing rate for some time now. So what do people do when they retire? Many seek residence in tax-friendly States with warmer climates. In fact, the latest data that I found (2002) shows that those States with the highest growth rates have been Nevada, Arizona, Colorado, Florida, Georgia, Texas and Utah. These States have seen population growth rates of 8.8% to 3, 7% from April 1 2000 to June 1 2002.
By comparison, the rust belt states like Michigan, Ohio, Wisconsin and Illinois, where a lot of these people are migrating from, have seen growth rates of only 1.5% for Illinois to .06% for Ohio. New York, another state that has seen a lot of its population head south had a growth rate of only 1%.
So what happens when people are leaving some states at a rate that is 4-8 times faster than other people are coming in? Well, for one thing you would see a glut of houses for sale since nobody is coming into the state to buy the ones that are being left behind by the retirees.
This is exactly what has happened with my neighbor across the street. Last year Butch retired from the local fire department and bought a condo down in Florida. He has been gone for over a year now. Unfortunately, no one is coming into the area who would be able to buy his $400,000 house (down from the $450K original ask price).
Next door to Butch is a couple who put their house up for sale after the husband was transferred to another state. In his case, his position is not being replaced in Wisconsin, so again there is a net loss to the area, so now you have two homes for sale right next to each other with no one moving into the area from out of state.
Over the past few years, some of the homes may have been purchased by Wisconsin residents looking to upgrade from another area. But you still have to sell your house in order to upgrade and if you are trying to leave a less desirable area, good luck selling out. Your only chance is if you had been a renter, but with interest rates as low as they have been, most of the renters have already become owners.
So where are the defaults coming from? Two places actually, the people leaving for greener pastures and the speculators who thought they could get rich buying and flipping hot properties.
In the first instance, I offer my brother-in-law as an example. He and his wife lived in a condo in her name near Ann Arbor, Michigan. Almost simultaneously, Pfizer closed the Plant in Ann Arbor where his wife worked and he got a nice job offer from a company in Texas. Finding a home in Texas was easy, but trying to sell a condo in an area where 1500 jobs were just eliminated was a futile endeavor. At the point where it would cost him money to try to hang on and sell the condo, he told the bank to “just take it”. His wife’s credit rating will suffer, but who cares, they already have their place in Texas and over time, she will be forgiven. While my friend Butch has let his daughter move in and pay rent in hope of riding it out a while, there was no such upside in my brother-in-law’s case.
On the other side, you have the real estate speculators, mostly amateurs who took a seminar or two offered some time after 2:00 AM on most cable stations. Anyone paying attention to the growth rates in Florida, Arizona, etc., could easily have assumed that the growth would continue for some time as the baby boomers are still just starting to retire. But once again, both the speculators and the developers ignored the other side of the equation; you have to sell your home in Michigan, Ohio, etc., when you move to Florida. When sales in the rust belt states slowed to a crawl, it was just a matter of time before the supply of homes in the retirement states would start to grow. Since many speculators purchased these homes and condos with little money down, hoping to flip them in a short amount of time, it would make sense that they would simply let the loans go into default and walk away. Again their credit ratings might suffer, but that only means that their real estate careers are done.
So in summary, I believe what we are seeing is nothing more than a short-term correction created by supply and demand imbalances usually associated with speculation and mass demographic changes. The end result will be a more stable real estate market, with more conservative lending practices and the loss of many jobs that were simply created out of the need to feed the speculation.
The bigger problem that needs to be addressed is the fact that many of the rust belt states have become tax-hells that have done nothing to promote business growth that could possibly result in an influx of working age people to the areas. In fact, the idiot, socialist Governor from Michigan is going after what few businesses are left in that state for more taxes and our Wisconsin Legislature wants to double the state income tax here in order to provide “free health care for all”, while this move, if successful may attract more people to this state, they are unlikely the type of people that could afford Butch’s house.