Of the many asset classes to be victimized by the end of cheap energy, residential real estate is perhaps the most vulnerable. A call option on future wage growth, and, leveraged to our liquid-fuel based transport system, housing in North America is currently making its way back to the stable, but barely appreciating asset it once was. However, having started this journey only recently there is still a long way to go. A long way in price that is, for housing to fall.
The housing crash is currently in the midst of its next leg down. In similar fashion to those who missed the initial crash, the past year has seen a number of observers calling for a bottom. One of my favorite calls came last year from Karl Case’s in an editorial in the Wall Street Journal. In A Dream House for All, Mr Case made the following argument: because house prices had fallen so much already, housing was now more affordable. But of course that wasn’t true at all. Not then, and not now.
Mr. Case was mistakenly anchoring his viewpoint on price to the purchasing power which existed prior to the crash. Yes, surely, last Summer’s house prices—had they existed early last decade with its flowing credit and growing economy—would have not lasted long on the market. But late Summer 2010 was of course not 2004. Indeed, Mr. Case’s error goes to the heart of the problem: it’s not only the massive debt and negative equity that ails housing. It’s the economic conditions, an inflationary depression, that really controls housing’s fate. Our structural unemployment, our flat to declining wages, and our rising food and energy costs. Each of these keeps knocking down the price level of houses.
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