Housing of Cards

by TED S. McGREGOR JR. & r & & r & & lt;span class= & quot;dropcap & quot; & H & lt;/span & ave you noticed more "For Sale" signs in your neighborhood? If you have, you're perceptive, because there are more -- a lot more -- than there have been up in the Inland Northwest for several years. Spokane and Coeur d'Alene, like the rest of the country, have been experiencing a massive real estate boom, and now, as gravity commands, the bust is coming.





According to Multiple Listing Service data, at the end of June 2006 there were 3,133 single-family homes for sale in Inland Northwest; by the end of this June, that number was up to 3,754.





But the Northwest seems to be weathering the storm better than the rest of the nation -- prices are up over last year in Seattle, Portland and even Spokane. But in Las Vegas, one of the hottest real estate markets in recent years, they have a record number of homes on the market, and their average selling price dropped by $10,000 -- in one month (between June and July). Nationally, there are about 4.2 million homes for sale, with another 500,000 brand new homes on the market. According to the National Association of Realtors, that's a supply of almost nine months; five months is considered normal. And an index of 10 cities shows prices have been dropping for five months -- the worst run in 16 years.





Despite what real estate types and financial reporters with rose-colored glasses say, the housing bubble is popping. The only question is how much air is going to go out of it.





& lt;span class= & quot;dropcap & quot; & S & lt;/span & o how did we get here? The short answer is that America started speculating in housing, just as we did with Internet stocks in the late 1990s and the Dutch did with tulip bulbs in the 17th century. Everyone from the house flipper, to the builder of subdivisions, to the army of mortgage brokers pushing deals, to the hedge funds that bought those mortgages as investments -- people all along the spectrum were speculating.





And it was a very contagious fever. People just looking for a place to call their own were stretching to get in the game before it was too late. And if they couldn't quite afford it, the financial industry came up with more and more elaborate programs -- adjustable rate mortgages, no down payment, no documentation. The credit craze went all the way to the top, as even our leaders put an entire $450 billion war on America's credit card (payment due to the Bank of Communist China).





As long as housing prices kept going up, the whole arrangement worked fine. It's hard to default if your house is worth more than you bought it for. Now with prices leveling off (and dropping in many places), the music has stopped and a lot of people can't find a chair -- again, everybody from average homeowners to multinational banks and hedge funds (at least 10 of which have failed already). Of course the big money people want a S & amp;L-style federal bailout. But should we bail out what was essentially an imaginary business model? If you hand out credit to anybody with a pulse, isn't widespread default a given? Shouldn't we let the market pass its harsh judgment?





& lt;span class= & quot;dropcap & quot; & M & lt;/span & any pundits see it getting a lot worse. Americans made tons of money on their homes in recent years, which helped fuel consumer spending. And in this economy, in which we've sent nearly 4 million jobs overseas and continue to watch the value of the dollar drop, consumer spending is how we make it all work. Now banks and others are tightening up their lending rules, and adding more fees to loans, so instead of having too much credit, now we may not have enough.





If consumer spending slows due to lack of access to money or a drop in confidence, the economy could easily contend with the war in Iraq as the top issue in next year's presidential election. And I would like to hear what the candidates have to say about these money messes we seem to get pushed into every generation or so.





Until then, I'll have to rely on the wisdom of the Founding Fathers, most of whom were skeptical of overly complex finance. As Thomas Jefferson put it, "If the American people ever allow private banks to control the issue of our currency, first by inflation, then by deflation, the banks and the corporations that will grow up will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."





Chilling words, and eerily prescient, as more Americans will be waking up homeless in the coming years. Moody's now estimates that 2.5 million American homeowners will default on their loans by the end of 2008. And most of those people will lose their homes as a result.





& lt;span class= & quot;dropcap & quot; & A & lt;/span & nd I guess that brings it all back home. How will this bump, slump, recession, depression -- whatever you want to call it -- play out in the Inland Northwest? We should probably thank our stars we live here, and not California, where sub-prime loans and adjustable rate mortgages were almost the norm.





But one of the charming -- and infuriating -- things about Spokane is our knack for missing out on big national economic booms. It comes in handy in times like this when we may not feel the busts quite as much.





In the final analsysis, nobody needed to own stock in a company that had a sock puppet for a spokesman, but a lot of people need to own a home. Housing is not going away, and when people look for a place to live, quality of life always plays a huge role. Hopefully Spokane and Coeur d'Alene have done what it takes to stand out as excellent places to live. That, in the long run, may turn out to be the only way to inoculate ourselves from the pain of another bubble bursting.