America is a cheap place to live. Especially if you don't live in the major metropolitan areas on the two coasts. According to USA Today, you can buy a four bedroom, 2½ bath, 2,200 square foot house in Killeen, Texas, for only $136,000. That's less than 100,000 euros - a price that would be unheard of in Europe. That's not only the cheapest price in the United States…it might be the cheapest price in the entire world. Even in Granada, Nicaragua, the price for a similar house would be about $150,000. In Mexico City, you'd pay $277,000. And in London…well, don't even think about it.
The USA Today report tells us that there is a huge, regional difference in housing prices in the United States. The price for the equivalent four-bedroom house is over $2.2…not nearly as much as you'd pay in central London, but still getting up there.
Meanwhile, other cheap alternatives in the U.S. are Minot, South Dakota, where the house would cost you $139,000…or Canton, Ohio, with a $146,000 price tag.
Here's an obvious idea, dear reader: Sell the digs in Beverly Hills; buy in Killeen. But wait. You say there's nothing to do in Killeen? We don't know…we've never been there. Maybe they have no Starbucks…no TGIFs…no multi-plex cinemas…no super-shopping domes…no sports stadiums…no fancy restaurants. C'mon, use a little imagination. There must be something you can do. How about rodeos and bull riding contests? Maybe they hunt and fish. Maybe they spend long, slow Sunday afternoons rocking on the front porch. Or, maybe they just hang out at the local saloon. Hey…this is sounding like the sort of place we might like!
U.S. Gets a 'D' in Flation 101
"A fresh blow to the housing market," is how the Financial Times describes it.
The Daily Telegraph comes up with a more bodacious headline:
"US housing market in freefall as prices crash."
And follows up with this:
"Sales of new homes in the US plunged in August at the fastest rate since modern records began, prompting fears the economy is sliding into a full-blown recession…
"Total sales dropped 8.3% on the month and are now down 21.2% during the past year, a sign that the credit crunch has cut off mortgage funding for large numbers of people."
Both papers give us new data on house prices:
"The median home sale value fell 7.5% from $246,200 to $225,000, its lowest since January 2005," says the FT.
Two and a half years of price increase - wiped out.
But in go-go areas, even bigger gains have gone-gone. Miami was one of the hottest housing areas in the nation. Now, its condos are being marked to market. Here's the report:
"There are at least 50 buildings under construction or nearly completed in the downtown Miami area alone, consisting of about 20,000 units," reports David Sutta from CBS4.com in Miami.
"To move inventories along, developers have gone to the auction block to get them sold.
"On Thursday evening, at the Miami Biscayne Bay Marriott Hotel the gavel struck as auctioneers sold about 20 units in the 119-unit Platinum development owned by Alex Redondo.
"When it was all over, [one bidder] walked away with a two bedroom unit on the 19th floor. To put the price in perspective, a one bedroom priced at $350,000 sold on average at auction for $176,000, almost half.
"A two bedroom unit that sold for about $600,000 last year, sold on average for $295,000."
Yes, dear reader; if you are thinking of moving to Killeen, Texas, you better act soon. Those big housing gains are disappearing. In Miami, prices are being cut in half.
You might be thinking…well…one man's loss is another man's gain. But think again. While the bidders got apartments at half-price, the owners of other apartments saw their assets lose 50% of their value almost overnight. A week ago, they may have had an apartment worth $600,000. Now it is worth only $300,000 - and falling.
What happened to that $300,000? It vanished. Poof. That's what put the 'd' in deflation. Money d-isappears. Wealth d-issipates. Values d-ecline. The economy d-egenerates. People get d-epressed.
Meanwhile, stocks held steady yesterday. Stock market investors seem to think they've got a "Bernanke Put" on their hands - an option that will always protect them from losses; if stocks begin to go down…Bernanke will just cut rates.
But Robert McAdie, head of credit at Barclay's Capital, addressed the issue yesterday. He noted that though the Fed may cut rates, and may bail out a few large speculators, there is no guarantee that money will find its way into the hands of the people who really need it. A bank can borrow from the Fed at the Fed's rigged rates, but that doesn't mean it isn't going to be careful with the money. Rates dropped after the Fed funds cut last week, but long-term finance rates actually went up…and the gap between the Fed's rate and the banks' own interbank lending rates remained unchanged. What gives? Lenders are still worried. They're afraid they might let out some money…and not get it back. So, they demand a little extra return, as protection. In July, the spread between commercial paper and the fed funds rate was only four basis points. Now, it's 62.
Money is cheaper, generally, but as McAdie put it:
"Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO [collateralized loan obligations] market that financed them is effectively closed."
Oh my… The homeowners can't sell their houses. And the Wall Street hustlers can't sell their deals. How d-isappointing. How d-iscouraging. For example, the Bank of Montreal - Canada's fourth largest lender - announced that it couldn't get rid of its asset-backed paper. And the global mergers and acquisitions market got hit in the head with a brick. After setting a record in the first nine months of the year, the deals declined 42% in the third quarter.
What's an investor to do? Without 'deals on wheels,' what will keep stocks rolling? And without rising house prices, how will consumers keep spending? And without consumer spending (it is 72% of the economy…no economy in history ever depended so much on people spending money they didn't have on things they didn't need), what will prevent the U.S. economy from going into recession?
We don't know. But, as a dear reader remarks below, there are many things we don't know…
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