Lambert here: One more example of why it’s expensive to be poor.
By Rana Foroohar, Global Business Columnist and an Associate Editor at the Financial Times, based in New York. She is also CNN’s global economic analyst. Originally published at Evonomics.
In the midst of the housing crisis and Great Recession a few years back, I spent a lot of time traveling through the Inland Empire, a large metropolitan area in the middle of Southern California. It stretches an hour or two east of Los Angeles and Orange County, but is about as far away from the tony “OC” lifestyle as you can imagine. Made up primarily of San Bernardino and Riverside counties, the Inland Empire was at the heart of the subprime mortgage crisis and has yet to fully recover.
In the early 2000s, predatory lenders flocked to the area, offering dicey deals to the largely minority and lower-middle-class white populations who, unable to afford housing on the coast, still craved the American Dream of homeownership. It ended, as it did in so many neighborhoods and cities across America, in tears and massive foreclosures, turning entire cities into ghost towns of derelict properties.
As recently as 2012, when I visited the Del Rosa neighborhood of San Bernardino, one of the hardest-hit cities in the housing crisis, remaining homeowners’ efforts to keep their properties up were being thwarted left and right. Groups of young men and school-age kids with pit bulls in tow hung out in front of corner bodegas at midday. For every well-kept bungalow with freshly cut grass and potted plants on the porch, there was an abandoned building spray-painted with gang graffiti or strewn with dirty mattresses and empty liquor bottles. Highway billboards featured mainly ads for credit counseling, megachurches, and mobile home dealers.
There’s a housing recovery on, but you wouldn’t know it in places like San Bernardino—and finance is one big reason why, not just because of its role in the crisis, but also because of its role in the recovery. Such communities are slowly healing, but many still struggle with residual blight from the housing boom and bust. Unemployment rates remain above the national average, mortgage credit is still tight, and few who’ve managed to hang on to their homes can hope to get anywhere near the prices they paid for them pre-crisis.
But rents, oddly, are rising. In fact, in many parts of the Inland Empire, they are higher than the national average, despite the poor economic statistics of the area. One 2014 survey of a select group of renters conducted in Riverside, a city right next to San Bernardino, found that 63 percent of tenants were paying at least 30 percent of their monthly income in rent, a level that the US Department of Housing and Urban Development considers unaffordable (a full 33 percent were paying more than half of their income to landlords). This strange paradigm, of working-class people in a not particularly desirable economic area paying more than they should for rent, becomes a bit more understandable when you know who their landlord is—Invitation Homes, the property subsidiary of Blackstone Group, the world’s largest private equity firm, and of late the nation’s largest purchaser of single-family homes. Thanks to its bucketloads of cash, economies of scale, and creative accounting, it’s managed to price many individual buyers out of the housing market over the last few years, cashing in on the recovery in housing, even as it made money before and after the crash.
Private equity funds like Blackstone are giant financial institutions that operate largely outside the scrutiny of governmental regulation, since they are officially designated “nonbanks” or “shadow banks”—never mind that many of them are bigger than the better-known institutions that are subject to regulation. Most people rightly associate private equity with offshore bank accounts (remember Mitt Romney and Bain Capital?), big corporate buyouts in which formerly healthy firms are loaded up with debt and stripped of their assets, mass layoffs, and an utter lack of transparency in their financial dealings. But these days, the big news about private equity is that it is at the heart of the country’s housing rebound.
Private equity investors have become the single largest group of buyers in the residential housing market, purchasing $20 billion worth of steeply discounted properties between 2012 and 2014 alone and reaping huge rewards as housing prices have slowly risen from their troughs. Blackstone, the biggest of the big private equity firms, with more than $330 billion in assets under management, has become the largest investor landlord in the country, with a portfolio of 46,000 homes and other properties that generated $1.9 billion worth of income in 2014, making real estate the largest profit center for the firm. Blackstone’s CEO, the infamous Wall Street titan Stephen Schwarzman, has called the firm’s move into the rental business in places like the Inland Empire a “bet on America.”
To be more precise, it’s a bet on the fact that fewer Americans can afford, in the wake of the financial crisis, to own a home. Thus an increasing number will be forced to rent from a Wall Street investor like Blackstone. Indeed, private equity’s rush into real estate goes some way toward answering one of the most perplexing economic questions of late: If housing is back, then why is the percentage of people who own homes in our country at a twenty-year low? Home values began rebounding from their post-financial-crisis trough in the beginning of 2012, and by July 2015, home sales had increased to their highest pace in eight and a half years. But the percentage of Americans who can call themselves homeowners is still declining from its peak in 2004, and many experts expect it to fall further as credit continues to be tight, young people struggle with higher-than average levels of unemployment, and baby boomers begin moving into retirement housing.
Fixing this housing crisis, as Warren Buffett once told me, is a fundamental prerequisite for fixing our economy. And yet, nearly eight years after the crisis of 2008, we aren’t there yet. The national housing market is in recovery, but like the larger economic recovery, it is incredibly bifurcated. Sections of Washington, D.C., and Los Angeles are booming, while Detroit, Atlanta, and California’s Inland Empire are still coping with foreclosures and mortgages that are underwater. One study of the housing markets in cities and towns across America found that the top 10 percent richest markets, ranked by the aggregate value of owner-occupied homes, held 52 percent of total housing wealth, equivalent to nearly $4.4 trillion. The bottom 40 percent, by contrast, held only 8 percent. It’s a stark statement about who has profited, and who hasn’t, from the housing recovery. The federal government is still underwriting most new mortgages in one way or another, via a multitude of state-sponsored programs and federally backed bonds. If a healthy housing market is one that is stable, affordable, inclusive, and not primarily dependent on government life support, then “we’re a long way from there,” says Yale professor and housing expert Robert Shiller.
How to create a truly healthy housing market is a question that matters to everyone, not just those of us who can’t afford homes. American consumers spend $2 trillion a year on housing, which triggers billions of dollars of additional spending in related industries like consumer goods, telecommunications and technology, automotives, construction, retail banking, etc. Research shows that rising housing wealth is much more likely to spur consumer spending than rising stock wealth is. Even after the crisis, people simply feel more economically secure when they own a home. And getting people to feel secure, and thus to spend more, is crucial to a sustainable recovery in an economy like America’s, where consumer spending accounts for 70 percent of GDP.
Some economists have called on Americans to reconsider the model of home ownership as the cultural norm, arguing that it would make more economic sense for people to rent rather than own, since the former increases labor mobility and helps diversify investment risk. That may be true for some groups and in certain parts of the country—one thing we learned from the 2008 crisis was that heavy mortgage debts aren’t for everyone. But the American Dream of home ownership is deeply entrenched. Like it or not, a home, not stocks or savings, remains the chief financial asset for most Americans. And that’s likely to continue to be the case over the next several years, since returns from stocks are unlikely to match those of the recent past. Moreover, there’s ample proof that home ownership creates more economic and social stability in communities, since owners tend to be more civically engaged than renters and have a greater stake in the quality of local schools, parks, and playgrounds.
Unfortunately, the economic climate and policy decisions taken since the 2008 crisis have resulted in a small group of rich investors— not American families—driving the real estate market and reaping most of the gains. Among them are private equity titans like Blackstone and high-wealth individuals who can pay cash upfront for a property.
That’s reflected not only in the lower rate of home ownership but also in the swelling ranks of renters; an increasing number of people simply can’t afford to own, which has in turn dramatically tightened the rental market. Not since 1986 have fewer rental properties been empty in the United States, and rents are rising sharply in many cities as a result.
One worry in the aftermath of the subprime crisis is that this dynamic, in which those without lots of cash and stellar credit (which is most people) have been left unable to buy homes, while Wall Street is able to continue to shape the housing market in ways that aren’t necessarily to the public benefit, will result in a spate of new soulless communities owned by investors who couldn’t care less what happens in them, as long as they get paid.
Private equity operates very much like the most leveraged parts of the banking industry, but on steroids. Since their birth four decades ago, private equity firms have perfected a business model that is designed to extract as much wealth from every target company with as little capital or risk to themselves as possible. The current business model “emerged out of the shareholder- value revolution and the leveraged buyout (LBO) movement of the 1970s and 1980s,” say Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research (CEPR) in Washington, and Cornell University professor Rosemary Batt in their influential book, Private Equity at Work.; as Appelbaum and Batt put it, the rise of private equity represents “a fundamental shift in the concept of the American corporation— from a view of it as a productive enterprise and stable institution serving the needs of a broad spectrum of stakeholders to a view of it as a bundle of assets to be bought and sold with an exclusive goal of maximizing shareholder value.”
If the markets are an ocean, private equity firms like Blackstone are the great white sharks that have perfected the use of debt, leverage, asset stripping, tax avoidance, and legal machinations to maximize profits for themselves at the expense of almost everyone else— their investors, their limited partners, their portfolio companies and the workers in them, and certainly society at large.
During the 2012 presidential race, Mitt Romney’s candidacy spurred a vigorous debate over whether private equity firms create or destroy jobs on a net basis. The research can be spun in many ways, but the upshot is that employment generally declines in companies that spend too much time in private equity’s hands. Job destruction is particularly bad in the retail sector, although the other end of the spectrum has some firms in which private equity’s overall effect on jobs is modest at best. But what’s clear is that the private equity model, even more so than most Wall Street practices, enriches a few investors at great cost to others. Let’s not forget that while private equity firms may operate as owners (though they often aren’t regulated or taxed as such), they are essentially financial intermediaries; they make money not necessarily by growing the pie, but by taking an ever- larger slice of it.
Adapted from Makers & Takers: How Wall Street Destroyed Main Street Copyright © 2017 by Rana Foroohar, Penguin Random House LLC.
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In order for poor and middle class America to “recover,” the U.S. will have to tackle several areas in addition to wages per se which I consider the basics of life: housing, health care, utility costs (including internet, which is no longer an optional goodie, but in fact a necessity), and water and food issues. Child care costs and transportation options are also areas that need support and improvement. Free public college education would be an improvement, too.
There are many things that can be done:
1. Single payer/Medicare for All
2. State banks to move home financing away from Wall Street rapists, er, “investors” and to provide banking services to the poor. Remember, even a better minimum wage will just be eaten up by these vultures.
3. Changes in utility regulation so that people don’t finance utility company profits unrelated to utilities (where I live, our bills rise whenever NiSource decides to dabble in real estate and other ventures).
4. Infrastructure investment to improve/protect water systems and sources.
5. Serious legislation to stop fracking, megafarms, etc. from destroying food and water.
Until our priorities shift from war and Wall Street to the ordinary citizen, nothing will change and the situation will worsen. Today, our “leaders” focus on keeping the elites and wealthy happy; we need a fundamental shift to starting at the bottom first, not last.
I agree with your priorities. Banks should be prohibited from making mortgage loans who’s service requires more than a third of disposable income. Rents should be subject to a similar constraint and Federal Housing money made available to maintain those properties where rents don’t cover maintenance. Housing, healthcare, food and water are the basic rights of a humane, sustainable society. That ours ensures none of these tells you its sustainability.
…bush-cheney deregulated “Public Utility Holding Company Act of 1930’s”, meaning utilities are now (as prior great depression) largely privatized also…
…called my friend-Congressman, then state rep when Puget Sound Electric was privatized…who emphasized he was warned to have nothing to say during 2 year process of.
Rates have continued inexorable rise…as have water rates-reason we are outside city limits, on well, and no city sewage. Electricity today is quite expensive for poor…
need new FDR regulatory capitalism…one crash appears not enough to engender…as obama continued bush-cheney-Wall Street bailouts (“quantitative easing”), and HC – “more of same” led to trump swamping drain…
“But rents, oddly, are rising. In fact, in many parts of the Inland Empire, they are higher than the national average, despite the poor economic statistics of the area…” Besides the financial parasites mentioned, supply and demand is not.
Lots of warehouse and some manufacturing jobs in the area compared to Los Angeles proper. These jobs attracts huge numbers of immigrants. I have three family members who grew up in Riverside and between them and their friends, 8 of them moved to the Midwest.
Population growth fueled by Immigration is not mentioned. Americans have done a good job of limiting family size and were it not for immigration, we would be at zero population growth.
Immigration creates a larger number of hosts for the financial parasites to feed on, that’s why they like and promote it.
http://www.pewhispanic.org/2015/09/28/chapter-2-immigrations-impact-on-past-and-future-u-s-population-change/
When you have seven persons in a household with five working for min wage paying a mortgage in Fontana is not that hard
oh, it’s hard enough, I assure you,lol.
Just in harder to quantify ways.
I feel fortunate that I don’t have to do that any more.
I also feel fortunate that my mom’s dna contains an imperative to maintain a homestead.
“Precariat” should be a political party.
Quite so!
But exploiting migrants is the american way.
But according to many, rentiers are doing us a favor and someone needs to pay for those guaranteed pensions…
In an article on underfunded pensions one poster declared that the problem was that there were way too many counties. If all of these were merged into one, there would only be 1 sheriff and a huge drop in public servants.
I think millions of Americans have bought lock, stock and barrel re. economies of scale, not understanding that the end game means a few super rich and the rest making minimum wage.
Private equity fits right into that ethos.
..please define “many”, with documentation from progenitor…(follow the $$$$)
“Research shows that rising housing wealth is much more likely to spur consumer spending than rising stock wealth is. Even after the crisis, people simply feel more economically secure when they own a home. And getting people to feel secure, and thus to spend more, is crucial to a sustainable recovery in an economy like America’s, where consumer spending accounts for 70 percent of GDP.”
I’m not sure if this thinking really is the path to “sustainability”, if that spending is just going to more “stuff” requiring ever more resource extraction. What you spend on matters too.
In any case, why does the US economy have to operate on a fixed of ratio of 70% of GDP being dependent on consumers? Maybe a little shift to dirty, dirty socialism with things like Medicare for All, or gasp, social housing could shift that % a bit.
You would be advised to be careful in taking the name of the statistic at its obvious meaning with a grain of salt. There are some strange looking things that go into that 70% “consumer spending”.
One is “imputed income”, which is not real but counted as such depending on context. For example, if you own your house, then consumer spending includes rent that you pay yourself for living in your own home. No money actually changes hands. Its not counted on your income tax form, but it is part of the consumer spending number. It is an economist accounting trick to somehow normalize across renters and owner. Depending on your purpose for the statistic this may even make sense.
The own your own house economic imputed activity is like 10% or so of the consumer spending. And its not the only weird thing in there.
I’m also rather suspicious of the “70% consumer spending” metric. If you look at the percentage of GDP that goes home in people’s pockets, it’s 43% and falling:
https://fred.stlouisfed.org/series/W270RE1A156NBEA
If consumer spending accounts for 70% of GDP, but actual consumers can only afford 43% of GDP, who’s paying for the rest? And what are they buying for us that counts as consumer spending? And why is the fraction of consumer spending that consumers actually control dropping over time?
…important…are insurance company – healthprofit industries included – GDP? Education – student loans? Bailouts of banks – private equity, and cost overruns-municipalities? (Michigan-“emergency manager”-water scam-Alabama sewage project)
Is interest collected counted as GDP?
When I learned about this (I believe this imputed rental income for homeowners is also included in GDP?) it fundamentally changed my world. This country’s housing system (really the real estate market was a whole) is so fundamentally broken. History (if there is one) will look back on the project of mass homeownership as a social and ecological catastrophe.
IMO, there’s nothing wrong with homeownership. The problem is where these homes are located, their size, the quality of construction and the number of dwellings owned per household.
Imputed rents are interesting. I, for one, love the fact that I don’t pay taxes on the imputed rent of my house, which I own free and clear. Believe me, that’s way better than deducting the taxes on interest payments.
I think the evidence is clear, that the banks which foreclosed on properties so willy-nilly they didn’t bother with niceties like paperwork are sitting on many of those properties. By keeping those properties out of the market, they are keeping the prices of houses and mortgages artificially high and sitting on land, you know land, the only true wealth, well its value isn’t decreasing. If they were to dump those properties at their true value now, the entire housing market would become more affordable, but since the money used to replace that lost by the foreclosed mortgages came with a zero interest-rate, sitting on those properties became a viable “strategy.”
Bingo. The sad thing is that, when they finally realize that they’ve created a world where nobody is going to ever buy those properties, instead of eating their just desserts they will be bailed out by their carefully cultivated friends in government. “It’s a big club and you ain’t in it”.
…reason current circumstance leads back to Wall $treet “control accounting frauds”…all of which Lambert and Yves and WK Black, among others, have exposed ever since…
As they have documented, MERS was internet cloud-escape attempt from registering mortgages in states of origin (illegal)…leading directly to state supreme court definition MERS did not create-contain title-deed, leading directly to “robo-signing”…
The “underfunded pension” excuse is distraction = diversion…
As somebody who was a big follower of the housing bubble and a predictor of its inevitable crash, I have a few observations.
The IE was always going to suffer a disproportionately deep and persistent crash in housing prices because of oversupply. It was only the utterly insane prices closer in that made commuting to LA from there an even vaguely reasonable proposition. Once the bubble burst, all the churn, speculation, and people who weren’t really ready to service a mortgage got removed from the demand side of the equation. With huge amounts of construction in the IE there was a ton of supply. In the face of an oversupply of single family homes, the least desirable drop the hardest and stay down the longest.
I was saying from the get go that the bottom would be formed by intentional (to distinguish from the accidental landlords trying to rent out their failed flips) landlords when prices came down enough for the rents to cover a mortgage and expenses, but credit was too difficult for many people who had been in the market to purchase. Organizations with credit or cash as opposed to people who don’t have enough of them. Traditional referred to as the “from the weak hand to the strong hands” part of the boom/bust cycle.
Blackstone and other PE firms are good at two things. Spotting bargains, and shady accounting. Actually running things on a long term basis is NOT their oeuvre. There’s a REASON that they get called “vulture capitalists.” Buy it cheap, load it with fees and debt, put some lipstick on that pig that will make it look good for a quarter or two and sell it before anybody looks too closely. If it does well, take the credit and the money. If it fails, blame the fact that it was already in trouble and keep the fees.
So it comes as not surprise that they are terrible landlords. They basically ignore most local laws about lease conditions, skimp on maintenance, and have the illusion that they will be able to use financial magic to make money. I suspect that in the end, this will end up being a big money loser for them, despite their financial shenanigans, Their just aren’t that many efficiencies of scale when managing scattered single family homes. And they don’t think that they control ENOUGH of the market to exercise monopoly control over pricing. Everything in RE moves in slow motion compared to equities, and it will take some time before people come to the realization that “I’m never renting from these people again.”
I would be curious to see how their initial plans to secularize the rental returns has gone. It looked like that model left a rump property management company with many liabilities and uncertain profitability to be sold off, and I just don’t see how the could do that.
The thing is that for many private equity players, they probably don’t care if they can actually offload these properties at a profit because the current fee structure permits them to stuff their personal pockets no matter the outcome.
Of course on their roadshows when raising capital, they will project these future profits and pension plans will invest based on these projections.
But even the pension plans don’t need to believe in these projections. They are asked to keep projected returns above 7% and the only way to get this on paper is by investing in alternatives.
Just like many here believe they have good reasons to be rentiers because of the economic situation, many pension administrators believe they must keep on investing in these alternatives to keep their job…
Also, land ownership is profitable. Being a landlord is not. Most people who are intentional landlords know that you aren’t going to get rich on a 4%-5% cap rate, but your gains at least beat inflation, which you can no longer do by just putting your money into a CD. I expect that these PE firms are looking at gaming the stock market with their inflated asset valuations for as long as possible, cashing out, dumping the properties onto the market and moving onto something else.
…those of us Poly-Sci, who witnessed Sept. 11, 1973, think of it not as “Blackstone and others-good at 2 things” – rather, part and parcel of “Shock Doctrine-rise of disaster capitalism” intention to destabilize….think Iraq, entire Middle-East, following Sept. 11, 2001, subsequent militarized police state, military-industrial complex, scapegoating of victims, win-win-win…
Is that what you meant by Sept 11, 1973? (I have the misfortune of having a strong, sometimes too strong, personal timeline).
Before doing the research, I’d have put the “Yum Kipper” war in Nov 1973. Maybe November was when the Oil Embargo hit South Africa, because my trip to Swaziland for the weekend got cancelled – Part of my Milnerloo years.
…not at all-Sept. 11, 1973, CIA assassination-overthrow of democratically elected Salvador Alliende’, Chile’, institution of Friedman’s “Chicago Boys economics, implantation of war criminal – U.S. puppet Pinochet:
https://www.youtube.com/watch?v=dRRUpO5kPhw
https://www.youtube.com/watch?v=jCNxYVCMzoM
..substance – subject of “The Shock Doctrine-Rise of Disaster Capitalism”, Naomi Klein.
more comprehensive overview-CIA driven U.S. imperialism: Talbot-“The Devil’s Chessboard”
(not to mention many other sources documentation)
I think nonclassical may be referring to the overthrow of the Government of Chile by Pinochet and the subsequent installation of a ‘Chicago School’ economy, which almost immediately (re)impoverished a large percentage of the population, killed many hundreds of thousands, and drove thousands more into exile.
The US (of course) had nothing to do with that, other than cheering from the sidelines. By the way, I have a bridge to sell.
…appears take a canadian know a canadian..(Naomi Klein)…Shock Doctrine should roll off lips of all Americans by now-as that is exactly what has (MalcolmX) “come home to roost”…it was Milton Friedman version of von Mises-Hayek Austrian school, economics…and it was south – central americans who originally defined it (spanish) as “neoliberalism” perpetrated by…as Nixon admonished, “Make their economy scream”…
…those completely unaware can find documentation here, for yet another:
(“Confessions of An Economic Hit Man”-John Perkins): https://www.youtube.com/watch?v=j1IvMLTQ6ew
Quite so!
But exploiting migrants is the american way.
PE investors are in a vulnerable position. They are busy screwing over local tenants when lical politicians are in an excellent position to force maintenance by the simple expedient of requiring more diligent building and health inspection. It would only take an increase in awareness at the local level.
Costs of maintenance are very closely related to the health of the economy. A tight economy is an expensive contractor market.
Plus the ability to exit the investment is entirely in Janet Yellens hands.
Just like the Mortgage industry with MERS, these big boys are just going to ignore local laws. It has always been the PE’s intention to be out of the business of landlording before any cases could work their ways through the courts, indeed before any potential investors would even NOTICE any cases working their ways through the courts.
As private equity gobbles up more housing they create their own positive feedback loop. By removing properties for sale they force more people into the rental market which drives up private equity profit from rentals. The increasing rent revenue streams are then repackaged into investment vehicles and sold. Obama on his way out the door put all of on the hook for the performance of those private equity investment vehicles. JHKunstler is very depressing but his statement that everything in America has become a racket is spot on. The other down side of private equity ownership of housing is that rentals rarely are maintained as well as individually owned homes. They are kept to the bare minimum of condition necessary to meet market demand.
Right, I think that’s the answer to the above skepticism about this PE strategy in housing. They dgaf they’re in it for the securities etc.
“Like it or not, a home, not stocks or savings, remains the chief financial asset for most Americans. ..”
This statement could be true but I’m not sure it’s desirable. The city where I live was barely affected by the real estate collapse of 08 and home prices have continued to rise. My home has increased in value by a factor of 10 since purchased 35 years ago. Meanwhile the working class population of 35 years ago have left because of affordability while the Dems who run the city fuss constantly about housing affordability as they brag incessantly about how they have increased real estate values. No one wants inflation of food, gas or clothing but we constantly drive for inflated real estate because that’s our pension. I’m not sure of the cure.
“The Dems who run the city fuss constantly about housing affordability as they brag incessantly about how they have increased real estate values.”
Oy. Isn’t that the sad truth?
And when you think about it, why should the value of housing rise over time? There’s certainly no intrinsic reason for it to do so. The ability of my house to provide shelter is no better today that it was when I first bought my house. And when you consider the dated wiring and appliances, the occasional maintenance issues that arise, and lack of conformance to the latest building standards, the value of my house should have gone down over time. But it didn’t. The Federal Reserve successfully pushed the value of my house up with their QE efforts.
That’s jolly good news for me and other homeowners who are now wealthier than they would have been otherwise. But it’s terrible news for anybody who doesn’t yet own a house and is looking to buy one.
Hmmm… I wonder if that same concern about pensions is why so many Dems were tolerant of the Federal Reserve goosing financial asset prices with QE. Now all of those underfunded pension plans (with their newly inflated stock holdings) have happier numbers. Just be sure to ignore how the rich got much richer and how income inequality growth went into overdrive.
It’s not the value of your house that’s rising over time, it’s the value of the land under it. Nobody’s making any new land but they are making plenty of new people who want a place to live.
And yes, it is often they same crowd who pat themselves on the back for doing their part to increase property values that later wring their hands about the lack of affordable housing. Exactly what’s happening in my city. Every housing or zoning problem the city faces can only be solved by offering carrots to developers and speculators according to the planning department and city council.
Bingo, and good lord is it infuriating not only to know this and yet be maddeningly incapable of persuading anyone with any power that perhaps they should revise their assumptions, but to also be, at the same time as a 30 year old, *a living embodiment* of the consequences of this insanity!
For a brief time I could comfort myself thinking “well, those homeowners riding the bubble will feel pretty foolish when everyone is too poor to buy their house from them!” But now? Sh*t, the PE vampires will buy them..
Harder and harder to not feel like a serf. Guess I should’ve picked a different year to be born so I didn’t graduate college directly into a global financial crisis
Important post, Lambert, thanks.
Funny how there’s a scene in Goodfellas where the mafia buys out a local restaurant, saddles it with debt after loading it up with tons of inventory, steals the inventory, arsons the place, then claims insurance on the “burned-up” inventory.
But this is legal when the Captains of Industry do it!
As a tax activist in this state, I have been looking closely at property taxes. Oregon went one step further than California’s Proposition 13. Even when a property (commercial or residential) is sold, taxing jurisdictions can’t collect on the full “real” market value. Oh, there are “exception events” that county assessors are supposed to include for major remodeling. But don’t.
Leading up to 2008 and post “recovery,” the differences between assessed and “real” market values have skyrocketed, surely promoting our bubble market… and the rental market. Since 1990, we limited property taxes twice, rolling them back to mid 1990 real market values that are capped at 3% per year increases. It’s an amalgam of rate- and levy-based computations that centralizes school funding to distribute it more equitably.
How many homes and large residential units are owned by Blackstone et. al. would be hard to figure out. In Washington County (home of Nike, Intel, Columbia Sportswear), the County Commissioners have eliminated ownership on the searchable tax records.
Efforts to pass legislation to limit predatory landlords failed this past session thanks to the rentier class of the Democratic Party of Oregon.
I wish more people knew more about Georgism and taxing rents.
https://www.nakedcapitalism.com/2017/04/land-disappeared-economic-theory.html
https://en.wikipedia.org/wiki/Georgism
The problem is that land value taxes penalize conservation and help gut the middle class. My state has no income tax, a low sales tax, and funds services primarily by land taxes. The poor pay nothing except subsidized rent, the rich keep most of their assets liquid or in shells, and the middle class takes it in the shorts. Meanwhile, slumlords have no incentive to keep their properties above barely habitable because any improvements increase property value which increases their taxes. The theory sounds great but in practice, it is a disaster.
Henry George advocated for taxes on the unimproved- IE, not counting the building- value of the land, unfortunately it seems most economic policies designed to reduce “rents” (in the classical sense of the term) get twisted in implementation so that they have the exact opposite effect of what was intended.
This week on the NPR show, On the Media, some young Fake News guy was inferring that jobs offshored to China or Mexico was some kind of tinfoil hat boogeyman!
This morning on local Seattle radio station, KIRO, they were talking with CBS/Wall Street analyst, Jill Schlesinger, who claimed falling wages from 1973 on was due to women entering the work force in large numbers.
Now, there is some truth to this — and let’s not forget that 1973 was the year when American women were finally allowed under the law to sign or co-sign on mortgages, and overnight mortgage prices skyrocketed upwards (odd how that works in the opposite direction whenever bankers are involved) — a larger labor pool tends to drive wages downwards, especially when labor has been globalized!
So let’s examine a larger data set: international growth in total employee compensation since 1985 (originally published at Bloomberg’s):
TOTAL EMPLOYEE COMPENSATION INCREASES SINCE 1985
Denmark >>>> 220%
German >>>> 194%
Netherlands >>192%
France >>>>> 154%
Australia >>>> 64%
USA >>>>>>> 0.47%
That was 0.47% for the USA compared to Denmark’s 220% — and yes, women work in those countries!
What specifically is interesting about the year, 1985? That was the year the explosion in American jobs offshoring occurred, with General Electric leading the way.
GE wasn’t just offshoring manufacturing jobs — as important as that is — GE was also offshoring R&D scientist jobs, and engineering jobs, and programmer jobs and technician jobs. In the 1980s India and China were the prime countries to offshore jobs to — and that hasn’t changed, but many more countries have joined that list.
At least GE pays taxes, right? Negative, between 2008 to 2015, GE paid no federal taxes. (That must be why President Obama appointed GE’s CEO to be his jobs czar — they excel at offshoring jobs and paying zero taxes!)
Several weeks back on NPR’s Marketplace show, the creepy-voiced host, Kyle, interviewed Marina Whitman who, at 81 years of age, is with the University of Michigan. Not mentioned was that Marina von Neumann Whitman, daughter of John von Neumann, is a life-long member of the Bretton Woods Committee (brettonwoods.org), the lobbyist group for the international super-rich, and that she was an executive with General Motors when they were offshoring many a job. (Must be nice to offshore jobs while always staying employed — even at the age of 81!)
Whitman was in whining mode — oh so sympathetic that there had not been enough — or most frequently zero — training for those laid-off workers due to offshoring.
So there we have it — the offshoring of American jobs is obviously a tinfoil hat explanation for why total employee compensation increased in Denmark by 220% but only increased in America by a pathetic and paltry 0.47% — and yes, the moon is made of green cheese and American women are to blame for everything!
https://itep.org/wp-content/uploads/35percentfullreport.pdf
Both the quality and quantity of jobs have been diminishing for roughly my entire life so I do not know how anyone could think that this was fake news. Also the job situation being what it is, how does one truly believe in and support the idea of more training as the cure, and be surprised when the economy is worsening and that political and social unrest is happening.
Everything is connected, but I guess when your paycheck depends on it, you’ll believe and say anything.
While ranting, I almost forgot why I was replying. On looking at women for being the cause of our economy’s problems, people find it hard to look at all the parts instead of the what is convenient.
This week on the NPR show, On the Media, some young Fake News guy was inferring that jobs offshored to China or Mexico was some kind of tinfoil hat boogeyman!
This morning on local Seattle radio station, KIRO, they were talking with CBS/Wall Street analyst, Jill Schlesinger, who claimed falling wages from 1973 on was due to women entering the work force in large numbers.
Now, there is some truth to this — and let’s not forget that 1973 was the year when American women were finally allowed under the law to sign or co-sign on mortgages, and overnight mortgage prices skyrocketed upwards (odd how that works in the opposite direction whenever bankers are involved) — a larger labor pool tends to drive wages downwards, especially when labor has been globalized!
So let’s examine a larger data set: international growth in total employee compensation since 1985 (originally published at Bloomberg’s):
TOTAL EMPLOYEE COMPENSATION INCREASES SINCE 1985
Denmark >>>> 220%
German >>>> 194%
Netherlands >>192%
France >>>>> 154%
Australia >>>> 64%
USA >>>>>>> 0.47%
That was 0.47% for the USA compared to Denmark’s 220% — and yes, women work in those countries!
What specifically is interesting about the year, 1985? That was the year the explosion in American jobs offshoring occurred, with General Electric leading the way.
GE wasn’t just offshoring manufacturing jobs — as important as that is — GE was also offshoring R&D scientist jobs, and engineering jobs, and programmer jobs and technician jobs. In the 1980s India and China were the prime countries to offshore jobs to — and that hasn’t changed, but many more countries have joined that list.
At least GE pays taxes, right? Negative, between 2008 to 2015, GE paid no federal taxes. (That must be why President Obama appointed GE’s CEO to be his jobs czar — they excel at offshoring jobs and paying zero taxes!)
https://itep.org/wp-content/uploads/35percentfullreport.pdf
LEGAL GAMBLING
The gloom is fading from the real estate situation.
More nibbles during the last few weeks
than for the last three years. If January brings us
good rains, this next year will open the door to
the sunshine—a case of rain bringing the sun.
It is to be hoped, however, that there will
never be another boom. The crash of the boom
of 1923 was due to the same causes that wrecked
the Wall street stock market. People sold what
they did not own. They made a payment down
in the hope of getting the property off their hands
before it began to burn. Real estate fell into the
hands of sharp-shooting gamblers who had no
interest in land. To them it was just a pile of blue
chips on a roulette wheel.
Harry Carr, in Los Angeles Times. 1929
85 years later……….
On another note above “Research shows that rising housing wealth is much more likely to spur consumer spending than rising stock wealth”
IMO the term ‘wealth’ needs definition.
If what was meant that increasing home values increases spending….that only happens if debt is issued upon the equity…which through compounding interest, eventually eats up more income but temporarily increases outgo in spending. The first order however is… the less spent on the dwelling leaves more for spending, IE with a constant income… any increase in the cost of putting a roof over ones head leaves less for other spending.
I read an account of land speculators in LA in the midst of the 1880’s real estate bubble there, pinning oranges on non citrus trees to make the properties more appealing to potential buyers.
Staging has become a bit more sophisticated since…
A couple of collateral observations might be of interest, re Wall Street literally owning Main Street’s real estate businesses. Circa 2005, I discovered that all three seemingly independently realtors on the main street of my small town — Coldwell Banker, Century 21, and another — were all franchises owned by (what is reasonably called a Wall Street equity entity) Cendant Corporation. Until Enron, Cendant set the high water mark for securities fraud. The New York Times wrote an article on Cendant’s CEO Silverman, characterizing him as the nation’s most overpaid CEO. (Silverman himself avoided conviction per the dumb CEO defense–the case against him/Cendant was ultimately dismissed as part of the 2008 Stoneridge whitecollarwash–552 U.S. 148.)
I learned this through suing the Coldwell Banker franchise for fraud, including physically altering the seller’s declaration, so as to suppress defects in the property I purchased. Despite being solely responsible for advertising that Coldwell Banker real estate agents were especially trustworthy, Cendant successfully moved for summary judgment, on the grounds that the Coldwell Banker agents were in reality not agents of Coldwell Banker, and that I should have known this, owing to an obscure small-print “independently owned and operated” disclaimer.
Excellent article and particularly the heading Lambert. We are in an age when Wall Street owns everything – credit cards, auto loans, overdrafts and the preponderance of companies.
I was perplexed by the ability of the gas frackers to keep their heads above water – new wells being drilled all with short lifespans – then I realised they are in hock to the banks who are willing to maintain the entire industry thru unprofitability because its better than pulling the rug.
That decision derives from having an inexhaustible supply of greens to feed the beast. Ain’t life grand so long as the people think its valuable.
exorbitant housing costs are basically transfer costs (extortion) from the next generation.
It is not surprising that they refuse to get married or have kids under the circumstances.
Same happened in Japan.
The system will just keep increasing the rent it can extract from assets till only 25 Bangladeshis to a room will be able to afford to pay it (reality in Queens, NYC).
Entire generations are rentiers? Oh. OK.
Am I the only one who finds it disgusting that blackrock is profiting off the misery of low income renters? And why couldn’t a govt body take over these houses and rent them out to the foreclosed people at cheaper rents?
…”destabilization” is not accidental: https://www.youtube.com/watch?v=j1IvMLTQ6ew