Monday, April 14, 2008

When Irish Eyes Aren't Smiling

If you want to feel better about our housing melt-down, read this article from today's New York Times. I think a lot of people, myself included, knew the housing boom couldn't last forever but didn't realize the extent to which the problems there would drag down our entire economy. But check out the chart with the article: residential investment is a little less than 6% of the gross domestic product in the U.S.. In Ireland, it's almost 14% of GDP. (At least that is how it looks on the chart-- the body of the article says it's 12% in Ireland and 4% in the U.S. Maybe they need to draw those graphs a little more carefully!) Spain is also in trouble, with thousands of new homes sitting empty and prices dropping.

Economists have been busy cutting their growth forecasts for Spain, with a few saying that it may stagnate this summer. BBVA, a leading Spanish bank, forecasts that unemployment will rise to an average of 11 percent this year, from 8.6 percent in 2007.

Such cutbacks are well under way in Ireland, where the taxi drivers complain that their ranks are being swollen by laid-off home builders. The housing collapse has brought an abrupt end to more than a decade of pell-mell growth that earned Ireland the nickname “the Celtic tiger.”


But at least here in America, the rich are still spending:

Who said anything about a recession? Sometime between the government bailout of Bear Stearns and the Bureau of Labor Statistics report that America lost 80,000 jobs in March, Lee Tachman spent roughly $50,000 last month on a four-day jaunt to Miami for himself and three close friends.

The trip was an exercise in luxuriant male bonding. Mr. Tachman, who is 38, and his friends got around by private jet, helicopter, Hummer limousine, Ferraris and Lamborghinis; stayed in V.I.P. rooms at Casa Casuarina, the South Beach hotel that was formerly Gianni Versace’s mansion; and played “extreme adventure paintball” with former agents of the federal Drug Enforcement Administration.

Mr. Tachman, a manager for a company that executes trades for hedge funds and the owner of “a handful” of buildings in New York, said he has not felt the need to cut back.

“I always feel like there’s a sword of Damocles over my head, like it could all come crashing down at any time,” he said. “But there’s always going to be people who are trading, and there’s always going to be a demand for real estate in New York.”
Here's another nice quote:
In October, Marc Sperling, the 36-year-old president of an equity-trading company, bought a new condo on the Upper West Side in a building where four-bedroom apartments like his cost more than $4 million. When he moves into the completed building next year, he plans to hold on to his other two apartments in Murray Hill and Miami Beach — each of which he values at about $2.5 million.

Mr. Sperling views the nation’s economic slump as a temporary problem, and is grateful that it has yet to affect him. “I think if you have the means to ride it out, that’s what you do,” he said.

His view of the subprime mortgage crisis seemed to reflect a sort of inverse class resentment.

“I don’t want to sound harsh, but the people who were buying million-dollar houses with a combined household income of $70,000 or $80,000 were the ones who were chasing easy money,” he said.

"Inverse class resentment." That is kind of a new one. Yes, there is greed and stupidity at both ends of the economic spectrum, but I'd point more fingers at the people in the mortgage industry who actually ended up benefiting from all this craziness, not at the middle class families who believed it when they were told they could have their little piece of the American dream and are now facing bankruptcy.


Anonymous said...

Love your blog. It's a daily stop for me on the interwebs. But your parting shot in this post bothers me. Obviously the mortgage indutry bears a lot of blame for inventing exotic products to encourage people to borrow more. But, do you really not believe the "middle class families" buying houses at 10-12 times their annual income are free of responsibility because "they were told" they could afford it?

The thing that bothers me the most about this whole crisis is the people who took mortgages they couldn't afford, expected to be able to pull even more equity out of those houses within a year via HELOC or flipping, and are now looking for the banks/the government/their neighbors to bail them out. It is an individual's responsibility to understand what he can and cannot afford, no matter what a company with a vested interest in the matter tells him.

Anonymous said...

Apologies for the terrible grammar above. Forgot to proofread.

Madame X said...

I think there is a lot of blame all around-- I do think a lot of people aren't financially savvy enough to know how much house they can afford. They SHOULD be financially savvy enough, ideally, but not everyone has the math skills to really get these things. That doesn't mean they don't deserve to own a house. And our whole society seems to be built on the notion that everyone can have a level of luxury that used to be only for wealthy people. When you add an under-policed mortgage industry to that mix, with brokers telling people they won't have a problem, and banks approving them, I think it's understandable that a lot of people made poor decisions.
That said, there were plenty of wanna-be real estate tycoons who deserve no sympathy or assistance at this point.
It's tough to judge these cases, as each is different, but I do think some lines can be drawn between people who were driven by greed and should have known better; and those who wanted to own a home like everyone else and couldn't distinguish good advice from bad.

guinness416 said...

One additional problem with the housing collapse in Ireland is the abnormally high percentage of the population who work in construction - 15 per cent is the last figure I saw. A certain amount of those are immigrants who may just move on to London or wherever, but a lot are people who will be losing their jobs and staying. And the cost of living in Ireland was ridiculous even in good times - there are regular news stories about how much more it costs to buy groceries, consumer goods, etc in Ireland versus other EU nations. I'm a Dublin native, and get the vapours every time I'm at home and buy a coffee or clothes or whatever.

Anonymous said...

Hi Madame X,

I thought you might be interested to read this article on the frugal billionaire founder of IKEA. I found the article via Huffington Post, but it's a UK Daily Mail article.

Sorry if I'm crappy at HTML links!

Anonymous said...

I was reading in a blog from Ireland that Proctor and Gamble had a plant in Ireland and paid good wages. Workers from Poland came to Ireland to work for P&G at the good wages, which were more than they could earn at home. Then P&G closed the Irish plant and opened one in Poland where they could get the Polish workers for less wages than they had to pay the Irish.

Anonymous said...

"Enough blame to go around" is well said. There are too many people expecting their first home to be way too big and nice. They stretch as far as a bank will permit and then blame someone else when it goes south. Sorry ... its not all the lenders fault, although a bit more oversight as to their practices would have been appreciate. When you give money away, most borrowers seem to have a hard time saying no.

By the way ... the NYTimes article mentioned yesterday in regard to home equity lines needs to be mentioned again. (another crisis waiting to happen) I am cringing when thinking about it since I was counting on our home equity to help fund higher education for our kids. Perhaps they'll be shouldering the debt themselves?

Anonymous said...

I agree with Liz on this one. It's like blaming the sexy BMW ads for making me buy a car I can't afford.

Shame on you X.

Anonymous said...

The banks and the mortgage industry are equally to blame as the borrowers. No one forced banks to make loans that people would be likely to default on. Yes, many people took on loans for more than they could handle, but banks knew risks that they were taking and the likely degree of default. It's like driving that brand new sexy BMW through a bad area and being surprised if you get car-jacked or mugged.

Anonymous said...

Yeah, I have to agree w/ Liz and others -- homebuyers are partly to blame too for their greed in buying more than they could afford. I say this as a homeowner who bought a small, older home I could afford, and now as a taxpayer I'll end up bailing out those who bit off more than they could chew.

But I love your blog -- so glad you're doing this! a public service.

Anonymous said...

I am the one with decent income and saving but still can't afford a house/condo. There are tens of thousands of professionals like me in NYC. I am not very crazy about the idea of bailing out some irresponsible homeowners too.