The Bubble, Then the Blues

Last February, the sirens howled in Hollywood as the 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 people shouted back expletives. A passerby might have mistaken the confrontation for a movie shoot, or perhaps the beginning of the next L.A. riot.

In fact, as LAPD Capt. Michael Downing later told the media: “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. At stake were 56 unfinished apartments being built by a nonprofit 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, another anxious mob -- this time made up 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.

No surprise there. 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 schools.

The Southern California housing crisis, of course, has a sunnier side as well. In the last five years, median home values have increased 118% in Los Angeles and an extraordinary 137% in neighboring San Diego, according to Business Week. Homes, as a result, have become private ATM machines, providing their owners with magical, unearned cash flows for purchasing new SUVs, making down payments on vacation homes and financing increasingly expensive college educations for their kids. Second mortgages and home refinancings, according to a Wharton School survey, have generated an astounding $1.6 trillion in additional consumption nationally since 2000.

The great American housing bubble is a classic 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 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 Boston-Washington 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 U.S. Treasury bonds despite their low or negative yields. Beijing has been willing to subsidize U.S. 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, D.C. -- have attracted voracious ant columns of pure speculators, buying and selling homes in the gamble that prices will continue to rise. The biggest beneficiary, 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 homeownership. In a bubble city such as San Diego, for instance, less than 15% of the population earns enough to afford 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 bubble, the Kerry campaign, as with healthcare costs and job exports, offered no compelling alternative. But the Republicans have more serious things to worry about than Democrats. As the real estate bubble reaches its peak, 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 Business Week recently headlined fears that a general deflation -- perhaps of international magnitude -- is nigh. What will life be like in the U.S. 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 end the current anemic recovery.

In the end, American 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.