In John Perkins’ 2004 best seller, Confessions of an Economic Hit Man, we are treated to factual stories of United States agencies repeatedly pulling a fast one on developing nations. The shell game is deceptively simple: convince a third world government it needs infrastructure to grow its economy and meet the needs of a swelling population. Loan that government more money than it needs for schools, roads, hospitals, oil refineries and mines. Charge a healthy interest rate, and stipulate that construction and operations must be contracted out only to U.S. companies. Fast forward a few years. The third world government, in part because the infrastructure isn’t finished on time and cost overruns are rampant, defaults on its loan. The buildings, refineries and mines, put up as collateral, become the property of U.S. banks or the contractors or both. The debt is not forgiven so the developing nation is still at the mercy of U.S. banks, and it no longer owns or controls much of the infrastructure for which it borrowed the money.
Capitalist imperialism at work? Jump forward a few more years. The United States government, corporations and citizenry are the three heads of a spending juggernaut, but our consumption owes little to getting rich on third world loans or investments. Instead, what were once considered developing nations—India, China and Russia in particular—are funding us, and they have also attached some strings. Be they with petro-dollars, Euros or through Asian central banks, a half dozen countries are buying a huge percentage of United States debt—Treasuries, corporate bonds and other instruments. They are flooding us with liquidity, thus giving us the means to buy their exports, which in turn allows them to loan us even more money. If there’s a new “capitalist imperialist” at work, it’s probably China, which is trying to tie up the natural resources of a half dozen African countries with the same shell game the United States once played.
Despite the current housing recession in much of the country, and the still unmeasured effects of the Great Credit Crisis of 07/08 on banks’ liquidity and lending practices, there is a good possibility, thanks to the Fed continuing to lower the discount and fed funds rates, we may be in a long-term real estate growth cycle. A credit crisis, as deep and troubling as this one is, won’t last if foreign governments continue to flood us with liquidity. Not only does that money have to find an outlet, but what better asset than housing, without whose health the American economy would suffer grievously. At the moment, a fear factor has affected the repricing and availability of credit for almost all markets, but with time those restraints will ease. There is too much at stake for the government not to come to the rescue, in some measure, of what has been the lynchpin of the U.S. economy for the last decade.
The current price and inventory corrections, when they’ve run their course, will simply create a new base for expansion. Two or three years from now, real estate prices will be headed higher, and not just because of pockets of wealth in the United States. For any country whose currency trades at a premium to the greenback (a strong currency is the byproduct of being a creditor nation), our commercial and residential real estate are currently at fire sale prices and may continue to be for some time.
Until there’s a sea change in the U.S. consumer’s addiction to debt, and we finance our consumption more with our own savings, we should be prepared for select real estate markets to prosper here and around the world. In the year ahead, as prices continue to come down, this may well present a genuine buying opportunity particularly in parts of Florida, California, Arizona, Colorado and Illinois. Santa Fe too presents opportunities. As third and fourth quarter statistics of 07 reveal, the market below $750,000 has been hit significantly, but unit sales above $1 million, particularly $2 million, are doing nicely, almost on par with 06. Many buyers cling to the sidelines, waiting for further deterioration in all market tiers, but others are picking up the most desirable real estate without waiting. It’s hard to measure, but it seems more than anecdotal evidence that more fortunes have been built on long-term returns on real estate than on any other asset class.
