Housing Bust Presages a New Recession

Until very recently the dominant message conveyed by the bourgeois media has been one of general optimism for the continued health of the American economy. The main economic indicators pointed to a continuation of the expansion phase of the so-called economic cycle. For all of 2006, the growth of the Gross Domestic Product (GDP) stood at 3.3 percent, the third straight of year 3+ percent increase. At the same time, other leading economic indicators, such as unemployment stood officially at 4.6%, inflation at 2.5%, both of which are considered to be signs of economic health by bourgeois economists, particularly in comparison to European economies.

However, as we have frequently pointed out in the ICC press, these periods of economic expansion that capitalism likes to brag about, in no way reflect a healthy economy or represent a reversal of the global economic crisis that began in the late 1960s. The general tendency is for each economic downturn, or recession, to be deeper and for each recovery to be weaker than the previous one. So in fact the economic recovery of the past five years was more fiction than fact. For example, at the height of the current economic recovery, poverty in America was worse than it was in the bottom of the previous economic downturn. According to the Census Bureau in 2005, 12.6 percent of the population – 37 million people – were living in poverty. “That means that four years into an economic expansion, the percentage of Americans defined as poor was higher than at the bottom of the last recession in late 2001, when it was 11.7 percent” (NYT Apr 17, 2007). Of course the “official” poverty statistics seriously understate the problem. For example, an alternative method for calculating the poverty level suggested by the National Academy of Sciences would have put the poverty rate at 14.1 percent in 2005, or 41.3 million people. But these statistics are ridiculous and completely distort reality. According to the official government rate, the poverty line for a family of 2 parents and 2 children in 2005 $19,806, and for the Academy’s alternative it was $22,841. It’s impossible to imagine how any family of four could survive on such abysmal income.

In any case, recently even among bourgeois pundits enthusiasm about the economy has petered out. Five years after the last recession triggered by the bursting of the stock market bubble and the dot.com collapse in mid 2001, there are numerous signs of economic downturn, most notably in the collapse of the housing market.

The chickens are once again coming home to roost for the capitalist economy. To revive the economy after the 2001 recession, the bourgeoisie responded with its usual medicine: easy credit and federal tax manipulation. From mid 2001 to August 2004, the Federal Reserve lowered the prime interest rate repeatedly, so that it reached historical lows and drove down the interest rates charged by banks and mortgage companies for loans to purchase real estate. This cheap money created an artificial demand – not a solvent demand – that stimulated the housing market, and accelerated increases in real estate prices due to an undersupply of housing. This in turn triggered an artificial construction boom to create new housing stocks to satisfy the demand, thus creating the housing boom that was in large measure the motor of the economic recovery. Speculation fueled this boom, as “subprime lending” companies engaged in speculative lending practices like granting mortgage loans without down payments or credit checks on borrowers' income. But good times don’t last forever, and as soon as the Fed started tightening credit to supposedly head off inflation, the real estate boom began to run out of steam. New homeowners got a reality check and quickly realized they had accumulated debts that far exceeded their ability to pay. Mortgage loan defaults are soaring, home foreclosures are hitting record levels, and subprime mortgage lenders have cut back drastically on making loans or have gone out of business altogether. Even traditional banks have started feeling the impact of the real estate bust, and are tightening credit and imposing restrictions on their lending practices.

After an unbelievable upswing fueled by rampant speculation in which an average home’s value increased 54.4 percent between 2001 and 2005 across the nation—even reaching more than 100 percent in some locations, housing prices are dropping. Houses for sale are sitting longer on the market and inventories of unsold homes have hit historically high levels, further depressing sale prices. Some economists are predicting a “correction” in housing prices of up to 30 percent down from present levels. This will wipe out the nominal wealth of many home owners overnight. With an oversupply of houses on the national market, fewer units are being built. The number of new, privately owned housing units fell from a peak seasonally adjust level of 2.3 million units in January 2006, to just 1.5 million in October.

The decline in housing sales and construction affected not only people directly tied to the housing industry, such as construction workers, real estate agents and mortgage brokers, but also industries that supply material to the construction industry. Analysts estimate the housing slump reduced US GDP growth by approximately one percentage point in the second half of 2006. If the slump continues to worsen, the consequences for the national economy could become even more serious.

Towards a New Recession

But the housing bust is only the tip of the iceberg. In recent weeks more bad news on the state of the economy has surfaced. The monstrous national budget deficit, driven up in particular by the war and sustained by an increase in foreign government ownership of US debt, shows the potential to damage the whole world economy According to some analysts, the recent stock market crash in China and other Asian countries, followed by a jolt that sent Wall Street reeling, was caused in part by perceived weakness in the American economy by America’s larger international creditors. The carnage in the manufacturing sector is another element that completely belies any optimism about the economy. This sector has lost millions of jobs in a flurry of plant closings and “restructuring” programs. And now the service sector has begun to experience a dramatic slowdown as well.

Bourgeois economists themselves, despite Fed Chairman Bernanke’s reassurances are increasingly convinced that the US economic situation is worsening and the only thing in question is whether it will be a soft or hard landing within the year. Bourgeois economists define a recession as two consecutive quarters of negative growth rates in the GDP. But this definition hardly touches the reality of what is going on at the economic level. It is clear that the American economy is preparing for a new plunge into the abyss of the world wide economic crisis of capitalism. The phases of the
”economic cycle” that the bourgeoisie uses to describe the ups and downs of its economy are nothing more than moments in the life of a bankrupt economic system, kept afloat by a pervasive state intervention characteristic of state capitalism. All the propaganda in the world about the bright future of capitalism and having nothing to fear from economic cycles, cannot mask the essential historic truth that the global economic crisis that began in the late 1960s with the end of the post war reconstruction period continues to deepen inexorably. The current generation of the working class no longer dreams of living a better life than their parents. The environmental crisis is being used to lay the groundwork for ideological acceptance of a cut in the standard of living. The working class, and indeed the entire society, is mired in debt. Any semblance of “prosperity” or “expansion” or “growth” is based solely on speculative schemes, which ultimately wind up aggravating the economic crisis even more. Eventually these deteriorating economic conditions will drive the proletariat to defend its class interests.

ES, 04/15/07.