Before the recent plunge in the stock market, the U.S. housing market was very
strong. Could the fall in stock prices assisted by corporate accounting also lead
to a downturn in the nation’s real estate market?
Household real estate rose in market value $903 billion, or eight percent,
between first-quarter 2001 and first-quarter 2002. With such growth, it was a
good time to own a home.
Analyzing data from the Federal Reserve System for January – March of this
year, Jane D’ Arista of the Financial Markets Center found that U.S. households
appeared to be recovering from the recession that officially began in March 2001.
President Bush played a part in this.
His income-tax cut, for example, increased households’ disposable income. The
fiscal stimulus from the president’s tax cut, however, won’t last.
Nevertheless, the tax cut did help to increase households’ savings and spending.
And for the year ending last March 31, the net worth of households was up about
As the prices of houses rose, owners borrowed over $93 billion against the
equity in their homes. The ratio of homeowners’ equity to real estate remained
about what it was during past years.
In the meantime, stock prices slipped, but saving rates climbed. Households
realized a gain of $340 billion in financial assets, while moving from risky stocks
to safer savings deposits and mutual fund shares.
But all was not safety and security in the investment arena for households.
Not by a long shot.
“Despite these shifts, households remain profoundly vulnerable to changes in
asset prices,” D’Arista noted. “Notwithstanding the incremental movement to less-risky
holdings, deposits and money market fund shares accounted for just 15.3 percent
of households’ total financial assets at the end of the first quarter.”
Speaking of risk, direct holdings of corporate stocks accounted for $5.7 trillion
of households’ overall $31.8 trillion in financial assets. Pension fund reserves
constituted another $8.8 trillion.
Turning to consumer demand, recall that households’ buying power based on rising
stock prices for such expenditures as home remodeling and leisure vacationing
is called the “wealth effect.” When the good times rolled as they did during the
all-time record party on Wall Street, the spending based on lending fun seemed
as if it would never end.
Yet for U.S. households invested in financial assets, the “wealth effect” appears
to be weakening, according to a recent Washington Post-ABC News poll. It confirms
“A fall in the housing prices would obviously undermine the indispensable support
home equity borrowing and refinancing provide to household consumption,” she warned.
“And by lowering the value of both tangible and financial assets, falling housing
prices would further dampen demand by diminishing households’ net worth.”
Against this backdrop, there can be no economic recovery in the U.S. before
the return of corporate profitability. This factor, which corporate fraud has
attempted to and ultimately failed to hide, is that profits flow from industrial
production, not financial speculation.
Below the surface of the stock market, it was the crisis of production, overproduction,
in a word, that set current events in motion. In a world of unmet human needs,
saturated markets with things that people have made but couldn’t be sold for profit
at prices that exceeded production costs sent the stock market skyrocketing.
Concerning Wall Street’s woes, Federal Reserve Chairman Alan Greenspan recently
blamed "infectious greed." But that is an effect, not a cause.
The U.S. housing market is a part of, not apart from, this generalized world
crisis of overproduction in commodities ranging from cars to coffee, computers
to fiber optics. How different industries deal with this crisis as it affects
and is affected by all industrial corporations and financial institutions involved
is sure to bring con-tinued disruptions to society in unforeseen ways.
In the meantime, U.S. households live in a nation which has the planet’s largest
economy and is the world’s biggest debtor. These are but a few of many factors
that make the exact timing of downward pressure on the market value of U.S. real
estate hard to pinpoint.
The stock market remains overvalued by historic standards. Corporations have
not begun mass layoffs.
And state and local governments? Their fiscal crises will likely weaken the
public’s purchasing power.
Much is unclear except one thing. Economists who looked below the surface of
the stock market boom and offered radical analyses were excluded from political
circles of power in the U.S.
That should now be a topic of discussion on Capitol Hill. But it isn’t and
the silence is deafening.
Seth Sandronsky is an editor with Because People Matter, Sacramento's progressive
newspaper. Email: firstname.lastname@example.org