One signal of the housing glut is homes sitting empty for months with “for sale” signs hanging in front. This glum image marks a dramatic reversal from 2004, when a robust housing market drove up consumer confidence, spending, and debt — the major engines for keeping the U.S. economy, and the world economy, chugging along.
The White House mantra is always buy, buy, buy! And, in recent years, those who could, did. They bought houses, encouraged by economic gurus who advised that owning a home was the equivalent of owning a bottomless pot of gold. And they bought foreign goods as well as domestic ones, ballooning the U.S. trade deficit to $850 billion in 2006.
A house of cards. Over the last decade, home prices soared more than 70 percent. Such hot performance attracted billions of dollars in global speculation to the U.S. real estate market, further fueling the boom. The National Association of Realtors estimates that in 2006, more than 31 percent of houses were purchased as investments.
But all this economic activity was based on an illusion of prosperity. While housing prices skyrocketed, workers’ wages between 2000 and 2005 fell. Despite easy credit terms, many homeowners found themselves unable to afford the big mortgages they acquired to compete in the inflated housing market — a problem exacerbated now that high interest rates are kicking in.
In Detroit, with the most foreclosures in the country, one of every 97 homes is being lost due to unpaid debt. As these houses go up for sale, they compete for buyers with new residences flooding the market. Already, the supply of unsold new homes is more than 50 percent higher than a record set in 1989 — with more houses on the way.
This cycle of oversupply, a result of unplanned, profit-driven production, is a plague of capitalism. And the painful losses it is causing in both human and economic terms is bound to worsen as real estate prices dive, profits evaporate, and easy credit tightens in response to loans gone sour.
The infection spreads. The crisis is contaminating global markets. Big-name financial institutions like Barclays Bank of England purchased high-risk U.S. mortgage debt because of the lure of high yields on investment. Now, in Germany, two banks are requiring major bailouts after suffering near-collapse due to huge investments in bad U.S. loans. How far will things unravel? No one really knows.
Meanwhile, U.S. mortgage companies and other businesses related to residential construction and sales are laying off thousands of workers. Sales in trucks, dishwashers, and other goods are starting to slump, creating an oversupply in other markets.
Companies like Whirlpool and Black and Decker hope to sell their goods abroad now that U.S. consumers are buying less. But they are entering a world market already saturated by businesses in China, Japan, and other export giants. Competition for overseas markets is bound to be vicious.
Economists are debating which way to jump. Should bankers loosen credit, running the risk of fueling inflation and creating new fragile bubbles? Or tighten credit, running the risk that spending will choke and that the resulting layoffs will usher in a full-blown depression?
Karl Marx identified this boom-bust cycle as one of the contradictions of capitalism that make it unsustainable. He also championed a solution — a worker-directed society in which production is planned to meet human needs rather than unleashed willy-nilly to reap profits for a few.
Socialism: it’s a concept whose time has clearly arrived!