Tuesday, February 24, 2009

Pondering the Economy of the Next 20 Years

I am looking at a quote from Ben Bernanke, chair of the Federal Reserve: "People are not likely to buy houses when they are unsure about their jobs." This quote is interesting because being unsure about one's job has become increasingly the norm since the 1970s. If anything, employment insecurity in the U.S. is accelerating as globalization and technology continue to expand the ways in which American workers can be made redundant. Bernanke's implication, in that context, appears to be that the house-based economy has died. People are not going to be able to buy homes en masse, and housing prices are not going to rise dramatically, for years to come. Indeed, even with a healthy recovery beginning immediately, it would probably take something on the order of two years to burn off the excess inventory and get back to a seller's market. At present, it appears that any recovery, whenever it begins, will be slow and weak for quite some time. In other words, we are not going through a trough in house prices. We are finding a new level of normalcy in house prices. In order to reach a level that people can afford and live with on their new, lower and/or less reliable incomes, "normalcy" may entail house prices that are shockingly low by last year's standards. Whenever houses do become more affordable, there will be some pent-up demand to help reduce the backlog of unsold homes. But the longer this interim period continues, the more likely it is that people will begin to develop other expectations or ideals for what a home can or should be. It is not presently clear what will happen in transportation, for example, to facilitate suburban home ownership: a year or two from now, it may or may not seem affordable and sensible to commute long distances by private vehicle. More emphatically, if unfolding financial circumstances scare people to such a point that they become savers, they may find it impractical if not ludicrous to buy as much house as they can afford. Profit from speculation in housing, for the ordinary homeowner, is years away at this point. What is more likely is that people will adapt to be happy with less, in terms of house size. In short, when house prices do finally stabilize, there is a good chance they will do so unevenly -- unpredictably, even, from the perspective of one who is still thinking in terms of what used to be desirable. The Great Depression made a lasting impression. It took the stock market 25 years to return to its 1929 high. Many who experienced the 1930s acquired lifelong habits of thrift and conservatism. If the present market meltdown burns people to a comparable extent, as it appears likely to do -- if, for example, it sears the image of grandparents who are struggling for health, fiscally and otherwise, on the memories of the next generation -- then it is likely to be spoken of with comparable respect and fear. People are going to be afraid to go back to the way we were thinking previously. Adaptation to a saving economy, if that's how it turns out, will likely be healthy for the nation and its people in the long term. For one thing, it could have the prospect of persuading a lot of people that one's living quarters exist for certain specific purposes within a larger social context. You buy the house you need, not the house you can afford -- and likewise, for that matter, for your form of transportation and other things. Flying by the seat of one's pants financially may come to seem so strange as even to discourage people from having kids without some confidence that they will be affordable -- unless, that is, things melt down to such an extent that flying by the seat of one's pants financially is the only way many people can survive.