The HS Dent Financial Blog

RSS      

In This Week’s Economist: Housing, Globalization, and More!

This week’s Economist covered several themes that we ourselves have been covering for the past several months, but we thought we’d start with this gem of a quote:

“The public is scared and uncertain; the politicians are panicky and confused. They are leading each other around and down a worrying spiral of ignorance.”  From “The Spiral of Ignorance”

This certainly seems to be the view of the market.  With the government reluctantly tiptoeing its way into a de facto nationalization of the banking system, the message being sent is one of uncertainty.  And the market hates uncertainty. 

Moving on to a topic near and dear to our hearts, the Economist inadvertently wrote an article on the demographics of home buying.   In “Very Little House on the Prairie”, the Economist writes about a new trend toward ultra-small, minimalist homes, some as small as 65 square feet (see photo).

The idea is to offer a greener and cheaper alternative to the dread McMansion…. The Small House Movement has been around for years, encouraging people to think about how much house they really need. But lately it has attracted more attention….

While we few the ultra-small homes profiled in the article as nothing more than a fad, we did find the following interesting:

…the average American home is pretty big. In 1980, according to the National Association of Home Builders, the median single-family home sold was 1,570 square feet. By 2005 that had expanded to 2,235 square feet.  The indications now, though, are that the trend is to scale back. According to the Census Bureau, the median size of home starts dropped to 2,114 square feet in the fourth quarter of 2008, down more than 100 square feet from the first quarter of the year.

This is where demographics come into play.  The McMansion, as a housing product, is dead for the foreseeable future.  The reason is that the Baby Boomers, the largest generation in history, have already passed the “trade-up” stage of their lives.  If anything, they are now downsizing to smaller quarters.  Meanwhile, the Echo Boomers, the enormous up-and-coming generation, are beginning to graduate from high school and college and begin their own cycle of family formation.  This means that demand for smaller “starter homes” should continue to be strong in the years ahead, the current credit crisis notwithstanding.  This explains, more any fads, why the American home is showing signs of shrinking!  This is an area we covered in Demographic Trends in Real Estate as well as in the pages of this blog, and we will continue to follow it going forward.

During hard economics times, people tend to become more isolationist, xenophobic, and protectionist than they would normally be.  There is no real mystery here; humans are, at heart, tribal creatures, and during times of crisis the tribe bands together for survival. 

Of course, while this makes sense in the Darwinian world of nomadic hunter-gatherers, it’s actually very damaging to a developed capitalist economy.  The Smoot-Hawley Tariff will for always live in infamy as one of the biggest catalysts to the Great Depression.  It is a fallacy that you can raise your tariffs and erect trade barriers and then expect no retaliation from your trade partners.  In the end, we all become poorer.  

Alas, it is a sign of the times; in “Turning Their Backs on the World” the Economist introduced us to a new word: deglobalisation.

The downturn has been sharpest in countries that opened up most to world trade, especially East Asia’s tigers. Singapore’s exports are 186% of GDP; its economy shrank at an annualised rate of 17% in the last three months of 2008. Taiwan’s exports are over 60% of GDP; and its economy may fall as much as 11% this year….In contrast, the biggest emerging markets are doing less badly so far. In India, where exports are around 15% of GDP, the government recently said growth in the year to April 2009 would be 7.1%; most forecasters put growth for the 2009 calendar year lower, but still about 5%.

We wrote about this very thing in “India vs. the Asian Model”   Unfortunately, the “good” countries who followed the economic rules have gotten punished…hard.  Meanwhile, the “bad” countries, who broke all the economic rules have survived relatively unscathed.  

 Speaking of “good” countries and “bad” countries (or states in this case), we turn again to that baddest of bad boys, California.  The Economist pulls no punches when talking about the Golden State, saying that “California makes Washington, DC, look like a model of fiscal probity.”  We would have to agree.  Consider these excerpts from  “The Ungovernable State”:

It turns out that the only way to negotiate a budget for the world’s eighth biggest economy is to issue politicians with toothbrushes and lock them in a building. California’s legislators have spent the past three months debating how to fill a $42 billion fiscal hole. Officials have given warning of fiscal Armageddon, bureaucrats have been forced to take unpaid leave and Arnold Schwarzenegger, the state’s governor, has accused members of his own party of innumeracy—all to no avail. But a few nights of indoor camping seems to have concentrated minds.

Governor Schwarzenegger didn’t revert to Terminator mode, but he may wish he had should this drag on much longer.   The Economist writes a good synopsis of how California got to this point:

The immediate cause of the budget crisis can be traced to Wall Street. California depends on income taxes for almost half of its revenues (see chart). Its tax code is so progressive—that is, rich-soaking—that in 2006 the top 1% of earners paid 48% of all income taxes. Since the wealthy derive much of their income from bonuses, capital gains and stock options, the state’s fortunes rise and fall with the markets. California’s economy is as wide and deep as the ocean, but much of its revenues come from froth. That froth has simply blown away.The sudden loss of revenues would not be such a problem if public spending had been kept under control. But whenever the state receives an “April surprise” of unexpectedly high income-tax receipts, as it did during the roaring middle of this decade, it ratchets up spending on public services.

We’ve written about this before (see “The Mess that Is California” and “Yet More Signs of the Times” to start), and we don’t see it getting better any time soon.