Rumblings and Tremors: Falling Incomes and Housing Prices
  (July 3, 2009)

Even if housing is bottoming in certain bubble-bust locales, what if incomes are still declining?

Today we begin with two fascinating reports from readers. We start with correspondent Bob Z.'s report on Las Vegas condos--one of several Ground Zeros for the housing bubble.

A house is a money pit, but a vacant house is a liability. We have nearly 20 million of these liabilities all over the country and every one of them is looking for cash, whether it be for taxes, insurance, mortgage payments, condo fees, maintenance and repairs or basic standby utility service. With rising unemployment and declining rents, I submit that we are not at bottom yet.

Those who think the real estate bottom is in should look at real estate markets in Las Vegas, Phoenix or Miami/Fort Lauderdale. In Las Vegas, there is a huge condo complex called Meridian at Hughes Center located 2 blocks from the Strip. 2BR 2BA condos that sold for $540K in fall 2005 were going for about 120K at the beginning of 2009.

My uncle wanted to invest in a couple of units in January but I told him "not yet." I watched the units drop to $99K around March or April, and thought about buying one, but didn't. Today those 2BR units 2 blocks from the Strip can be had for $75K, or about 15 cents on the peak bubble dollar. Another Vegas complex I follow has units that sold at $191K in 2006 now going for $35K.

Is this the bottom for Vegas? Well, I lived there for 8 years, and I don't think the bottom is in just yet. We are getting closer, but the bottom will not be in until we see some of these properties going for 10 cents on the peak bubble dollar. I see similar price declines in Phoenix and Fort Lauderdale, and I think those cities are also getting closer to bottom but they're not there yet.

The reason is simple: We still have rising unemployment and hundreds of thousands of new foreclosures every month. The supply of houses exceeds demand, yet builders are still building new houses!

This is an economic depression. The difference between this depression and the 1930s is that today we have unemployment payments, welfare payments, Social Security and Medicare. Those government programs are why we don't have armies of hobos wandering around the country and massive lines at soup kitchens.

But government tax receipts have fallen off a cliff. If we wait awhile, we will see government no longer able to borrow money, at which point it will be forced to print money or cut spending. Either alternative will finally put the lie to Mr. Bernanke's "green shoots" nonsense, and we will see the proverbial stuff hit the fan.

Thank you, Bob, for this eye-opening account. I would add that there is historical precedent for Bob's estimate of real estate falling to 10% of its bubble heights; in the depths of the Great Depression, some Manhattan buildings sold for less than the installation costs of the elevators.

Will every area's real estate values drop 90%? Of course there will be variations; the main guide will likely be "reversion to the mean," i.e. a return to the valuations established in the late 1990s before the bubble distorted valuations.

I would also suggest that prices will stabilize when it's stone-cold cheaper to buy and own than it is to rent an equivalent dwelling. However, that statement comes with two caveats: even buying a condo for $35,000 might be a poor choice if the capital is trapped. That is, if there are hundreds of other units for sale in that price range, then a buyer might not be able to sell their unit should they want to relocate.

The freedom to move has a price, too.

Secondly, condos have several potentially troublesome traits: common-area monthly fees and the maintenance of the common areas. If a huge condo complex has few paying owners, then it may deteriorate rapidly as there isn't a large enough "critical mass" of paying residents to support the common-area expenses. The first things to go may be the amenities which might have once been the most attractive elements: pools, landscaping, etc.

The other issue about those monthly fees is that they can skyrocket without warning if huge legal or maintenance bills arise. The condo association can't print money so it has no choice but to raise monthly fees. The fewer paying owners there are, the higher the rates may rise for the remaining solvent ones.

Next up: Correspondent Davin D. provided this report on the way incomes can drop without showing up in the headline unemployment statistics:

My story is somewhat tangential to Saturdayís topic about headline employment. I have a full-time job working for the US Government (lowly GS-8) in Austin, Texas. My wife is employed as a librarian in a local suburban school district. One child attends high school and lives at home, while the other is away college.

For the past 12 years or so, Iíve supplemented our income by doing contract work for a major textbook publisher. My assignments consist of correlating various state and local curriculum objectives to the textbooks (i.e. make sure the book contains the required subject matter). Itís been a nice part-time gig that and Iíve been able to earn between $15K-25K annually in my spare time.

Compared to most of the nation, Austin is in reasonably good shape economically. The local unemployment rate is probably around 6%, housing prices never elevated to obscene levels, and I havenít noticed a surge in foreclosures. Even so, most of the school districts in the area are implementing hiring freezes and/or salary freezes. Apparently budgets are strained everywhere.

Generally, whenever I complete a project, I submit an invoice and receive payment in two to three weeks; at least thatís been the case until this year. Iíve taken several projects this year, however beginning in February, the payments stopped coming. Iíve corresponded back and forth with my contacts and theyíve done likewise with the payroll division. After several apologies, they finally submitted a few payments in May (a small percentage of what they owe me). After the latest round of correspondence, my contact sent me a reply she received from payroll that basically said the company was delaying payments due to cash flow issues.

Now Iím thinking that these problems must have been ongoing for 5 or 6 months. Revenue is of course generated by sales made to school districts which are in turn funded either at the local level or the state level. I understand that California is on the verge of issuing IOUís to creditors, and several states or making various cuts while they pass budgets for the coming year. It seems likely to me, that many of these schools are going to have to make do with old textbooks or perhaps maintaining a classroom set of books without issuing individual books to students, etc.

If that is the case, independent contractors like myself will be out of luck. In my case, it wonít show up in employment statistics (Iím still employed full-time elsewhere), but Iíll have even less discretionary income, and will have to give up making contributions to my Thrift Saving Plan (the government equivalent to a 403B or 401K). Mine is just one example of shrinking income which does not show up in the statistics. The loss of income will result in our family spending less money in the community on entertainment, dining, and the like.

Thank you, Davin, for this insightful report. This account raises a number of very interesting points. I would start by noting that the "flexible, free-lance/ independent contractor" model of employment which has been lauded for the past decade as the key to America's rising productivity has some serious downsides--and I should know, as I've been a free-lancer for 20 years.

1. No I.C. (independent contractor) qualifies for unemployment, so when they lose steady work there is no backup income. There is no 6 or 9 months' grace period where the free-lancer can work on Plan B--they're relying on savings the moment they cash their last paycheck.

2. We free-lancers pay our own taxes quarterly. Once your income drops then it's dangerously tempting to short-change that next quarterly payment or skip it entirely. Yes, you will owe less because you're making less money, but those with formal jobs don't realize we all pay 15% FICA (self-employed Social Security) on every dollar earned. Toss in state and Federal income taxes and even supposedly low rates (15% Federal, etc.) quickly add up to 35% or more. That means big tax payments, and big tax problems if you fall behind.

3. As Davin points out, free-lancers' income can drop sharply but that won't be reflected in any employment statistic; it will only show up in declining tax revenues. And voila, income tax revenues at both the Federal and state levels have fallen by as much as 40%.

4. Laying off I.C.s and free-lancers is the low-hanging fruit for enterprises cutting back. Based on what I've read and heard, most of these initial "easy" cuts to head count have already been made. So the next wave of lay-offs of formal employees is still rolling. This may partially explain why there are still 500,000 new "official" lay-offs every month.

5. The number of I.C.s and free-lancers in the U.S. economy is simply enormous-- semi-official estimates put the number at 10 million but I would guesstimate the real number is more like double that: 20 million, or about 15% of the entire U.S. workforce of 137 million.

Many of these are facing zero income, others are scraping by with a few temp gigs and favors from old employers. None show up in official statistics. So when you read that 7 million people are officially unemployed, add in 14 million under-employed (barely scraping by) or totally unemployed I.C.s and free-lancers.

6. Many of the industries which supported I.C.s and free-lancers have been reduced to mere shadows of their former glories, and they won't be coming back. The print media industry supported tens of thousands of free-lance writers, editors, marketing types, ad agency temps, etc.--that industry is toast. The "creative" industries like music and film have also suffered huge cutbacks; as the Web has creatively destroyed income streams, then the number of jobs those industries can support shrinks dramatically.

7. "Consulting" is now a synonym for unemployment. Enterprises and government agencies which handed out consulting contracts like candy at Holloween in the good times have slashed consulting contracts to the bone. Many of these consultants had grown accustomed to pulling down $200,000 or more a year; with their incomes now essentially zero, that's a lot of business-class airline seats and fancy restaurant meals which will now go begging.

8. As regular employees get laid off, some will join the already overflowing ranks of I.C.s and free-lancers in the hope that they can transport their skills and contacts into a free-lance income. Some will, but most will be disappointed; principals and managers are trying to maintain their own income and the only way to do so is not hire and not subcontract out any labor except what is absolutely necessary.

It is easy to anticipate a "declining headline unemployment number" even as household incomes continue to fall. The government has a vested interest in spray-painting shriveled brown weeds green (as in "green shoots") but the only real metric of value is tax receipts. Those tell the real story: huge declines in real income and thus in spending.

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