Falling Home Prices Equal Rising Prosperity
In his autobiography, The Age of Turbulence, Alan Greenspan made the important point that knowledge over whether “the government will protect one’s property encourages citizens to take business risks, a prerequisite of wealth creation and economic growth.”
What Greenspan failed to mention is that the money we earn (and which the government issues) is a form of property as much as a business, a car or anything else we own is. And when the government oversees a devaluation of our money, it engages in high-class thievery whereby the money we earn and save is suddenly worth less. Just as income taxes reduce our disposable income and our willingness to work, so is currency devaluation a tax that enervates us.
Americans have suffered an impressive devaluation of the dollar since 2001; one that has succeeded in eroding the value of their savings and investments. To hedge against this aforementioned devaluation, the citizenry correctly moved its capital into asset classes that do well when currencies decline; everything from gold to art to real estate. All three tend to rise when the dollar loses value, so as the dollar’s decline began in recent years, Americans re-directed their capital into less risky assets of the “real” variety.
For its tangible qualities, real estate is one of the least risky asset classes, and one that acts like a commodity in response to currency movements. And despite a great deal of commentary suggesting major declines in property prices, the Ofheo Index of home prices most recently registered a .29 percent year-over-year fall, while a more bearish indicator such as the Case-Shiller Index has shown a decline on the order of 10 percent.
Equity investors would kill for these kinds of “catastrophic” corrections, but when it comes to real estate, politicians and commentators from both sides of the ideological spectrum have fallen over each other to talk up various policy solutions (to be funded by taxpayers and investors alike) meant to save the property market. If we ignore for now the long-term negatives that invariably result from government involvement in private markets, any steps taken to prop up the real-estate market will harm an economy that many of these pundits already feel is weakening.
That is so because the major driver of the commodity/real estate boom in recent years was once again the falling dollar. When currencies move in either direction, there is a certain redistribution of wealth from one part of the economy to the other. When currencies decline, rather than an economic stimulant, there is as mentioned a “flight to the real,” which favors those long on earth assets as opposed to savings of the bank account and equity variety. Investors have of course witnessed this in recent years with the Dow and Nasdaq at levels seen back in 2001, while commodity assets have soared.
When the government seeks to prop up the property market despite these relatively miniscule price declines, it makes real estate even less risky in ways that harm the broader economy. This is true because we live in a world of limited capital. When the latter flows to unproductive earth assets, innovative entrepreneurs who create even greater wealth and jobs are left to scrounge for what is left.
That’s the case because all available capital is the product of savings. When essentials such as property are dear, and take up an even greater portion of our limited savings, there is less money to fund new ideas of what the late Warren Brookes termed the “economy of the mind.” As such, the productive sector of the economy suffers.
Looked at simply, when an individual saves or invests, that capital frequently finds its way to entrepreneurs and existing businesses that will use it to grow while employing increasing numbers of people. The savings fund growth and wages. Conversely, when capital is flowing into the earth, there is merely a transfer of wealth; from the buyer to the seller. Jobs are certainly created, but at the expense of those created within capital-intensive industries such as technology and software that regularly increase our productivity, and in doing so, attract even more capital to U.S. businesses. Money that flows into the earth is consumed, whereas money that flows into technology multiplies and enhances worldwide economic productivity.
If we forget home price appreciation, we can say that rising housing starts and increased home purchases are merely a symptom of a growing economy of the mind. When people prosper thanks to heavy investment in the Googles and Microsofts of the world, they have income that funds the purchases of homes. When monetary debasement leads to property-price booms, the very capital that creates a long-term stream of buyers is consumed instead, and buyers (as we’re witnessing now with rising jobless numbers) eventually disappear.
All of which leads us to the Fed’s alleged dollar conundrum. It is said that fixing our weak dollar would be catastrophic for our economy given the misbegotten belief that the U.S. economy must implode to root out inflation. That is incorrect.
A stronger dollar would undeniably reward today’s economy for reversing our long, inflationary decline. Will there be pain? No doubt there will be for those long on property, art and commodities. On the other hand, the stronger dollar will necessarily drive more investment into the riskier, metaphysical economy over the physical; meaning a strong dollar would be a boon for jobseekers in ways that will make “mortgage walks” less frequent all the while creating a new class of homebuyers eager to use a smaller portion of their savings to enter a more affordable housing market.