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America's riotous real
estate
By Mike Davis
Last February the sirens
howled in Hollywood as the Los Angeles
Police Department (LAPD) rushed reinforcements to the 5600-block
of La Mirada Avenue. While a police captain
barked orders through a bullhorn, an angry crowd of
3,000 shouted back expletives. A passer-by might
have mistaken the confrontation for a major movie
shoot, or perhaps the beginning of the next great
LA riot.
In fact, as LAPD Captain Michael
Downing later told the press: "You had some very
desperate people who had a mob mentality. It was
as if people were trying to get the last piece of
bread." The bread-riot allusion was apt, although
the crowd was in fact clamoring for the last
crumbs of affordable housing in a city where rents
and mortgages have been soaring through the
stratosphere. At stake were 56 unfinished
apartments being built by a non-profit agency. The
developers had expected a turnout of, at most,
several hundred. When thousands of desperate
applicants showed up instead, the scene quickly
turned ugly and the police intervened.
A
few weekends after this tense confrontation in
Hollywood, another anxious mob - this time
composed of more affluent home-seekers - queued up
for hours for an opportunity to make outrageous
bids on a single, run-down house with a cracked
foundation in a nearby suburb renowned for its
good schools. "The teeming crowd," wrote Los
Angeles Times columnist Steve Lopez, "was no
surprise given the latest evidence that
California's public schools are dropout
factories."
Los Angeles' underfunded,
overcrowded and violent schools, according to a
recent report by Harvard researchers, currently
fail to graduate the majority of their black and
Latino students, as well as one-third of whites.
Parents, as a result, are willing to make
extraordinary sacrifices to move their children to
suburbs with functioning public education. This
gives the old adage of "location is everything" in
real estate a new twist: housing in southern
California is universally advertised and graded by
the prestige of local school districts.
The
southern California housing crisis, of course, has
a sunnier side as well. In the past five years
median home values have increased 118% in Los
Angeles and an extraordinary 137% in neighboring San
Diego. Homes, as a result, have become private
automated teller machines (ATMs), providing their
owners with magical, unearned cash flows for
purchasing new sports utility vehicles, making
down payments on vacation homes, and financing
increasingly expensive college educations for
their kids. Second mortgages and home
refinancings, according to a Wharton Business
School survey, have generated an astounding US$1.6
trillion in additional consumption since 2000.
The great American housing bubble,
like its obese counterparts in the United
Kingdom, Ireland, the Netherlands, Spain and Australia,
is a classical zero-sum game. Without generating
an atom of new wealth, land inflation
ruthlessly redistributes wealth from asset-seekers
to asset-holders, reinforcing divisions within
as well as between social classes. A
young schoolteacher in San Diego who rents an
apartment, for example, now faces an annual housing
cost ($24,000 for a two-bedroom in a central
area) equivalent to two-thirds of her
income. Conversely, an older school-bus driver who owns a
modest home in the same neighborhood may have
"earned" almost as much from housing inflation as
from his unionized job.
The current
US housing bubble is the bastard offspring of the
stock-market bubble of the mid-1990s. Housing
prices, especially on the west coast and in the
east's Bos-Wash (Boston-Washington, DC) corridor, began to rocket in
the second half of 1995 as dot-com profits
were plowed into real estate. The boom has
been sustained by sensationally low mortgage
rates, thanks principally to the willingness of China
to buy vast amounts of US Treasury bonds
despite their low or negative yields. Beijing has
been willing to subsidize US mortgage borrowers
as the price for keeping the door open to Chinese
exports.
Similarly, the hottest
home markets - southern California, Las Vegas,
New York, Miami, and Washington, DC - have
attracted voracious ant columns of pure speculators,
buying and selling homes in the gamble that prices
will continue to rise. The most successful
speculator, of course, has been George W Bush. Rising
home values have propped up a stagnant economy
and blunted criticisms of otherwise
disastrous economic policies. The Democrats for their
part have failed to address seriously the crisis
of millions of families now locked out of
home ownership. In a bubble city such as San Diego, for
instance, less than 15% of the population earns
enough to finance the cost of a median-value new
home.
Accordingly, if "values" were
the basis for the Bush victory last November,
they were property values, not moral principles
or religious prejudices. In the face of the
perverse housing bubble, the John Kerry campaign, as
with health-care costs and the export of jobs,
was simply running on empty. It offered no
compelling alternative to the status quo. But the
Republicans have more serious things to worry about
than Democrats. As the real-estate bubble reaches its
peak, George Bush may discover that he has been
surfing a tsunami and that a towering cliff looms
ahead.
The bubble has already burst in San
Francisco, and the April 11 issue of Business Week
headlined fears that a general deflation - perhaps
of international magnitude - is nigh. What will
life be like in the United States (or Britain or
Ireland) after the home-equity ATM shuts down?
The business press, as always, reassures
passengers that they are headed for a "soft
landing", a slowdown rather than a crash, but even
a mild jolt may be sufficient to end the current
anemic recovery and throw all the dollar-pegged
economies into recession. More ominously, some
eminently respectable Wall Street economists, like
Stephen Roach of Morgan Stanley, have been warning
of a dangerous negative-feedback loop between the
foreign-subsidized housing bubble and the huge US
trade and budget deficits. "The funding of
America," he has written, "is an accident waiting
to happen."
At the end of the
day, US military hegemony is no longer
underwritten by an equivalent global economic
supremacy. The housing bubble, like the dot-com
boom before it, has temporarily masked a mess of
economic contradictions. As a result, the second
term of George W Bush may hold some first-class
Shakespearean surprises.
Mike
Davis is the author of Dead Cities and
the forthcoming Monster at the Door: The
Global Threat of Avian Influenza (New Press
2005).
(The article has appeared on TomDispatch.com and has
been posted here by
permission) |
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