And so the American Decline begins

For the entire duration of the Bush years, with a flat stock market, a horrific bond market, skyrocketing fuel prices only now trickling down to other products, stagnant-to-dropping wages, continued outsourcing of high-wage jobs with the only job growth in the U.S. being in the low-wage sector, the economy has been propped up by the housing sector, as homeowners cash out the paper equity generated by skyrocketing home prices to keep themselves in consumer goods.

It's been an orgy of consumption based on illusory money, but the party's over. Here in my town, there are 47 houses on the market. Many of them have been sitting for months. In the last five years, about 1/4 of the houses in my neighborhood have been either torn down and replaced with McMansions, or have had huge additions done so that they emulate McMansions, or new kitchens. And I'd wager most of it was paid for with home equity loans. A friend of mine in a town with 80 houses on the market has cut her price by $50K after her house has been sitting for four months, and has had barely a nibble.

The housing market doesn't have to collapse completely for the overall economy to take a huge hit; a softening to the point that consumer spending comes to a screeching halt will do it. Well, folks, put on a helmet and fasten your seat belts, folks, because it's not going to be pretty:

The housing industry — which largely carried the American economy through the tribulations of the 2000 stock-market crash, a recession and climbing oil prices — has lost its vigor in recent months and now has begun to bog down the broader economy, which slowed to a modest 2.5 percent growth rate this spring.

That was a sharp comedown from the 5.6 percent growth rate of the first quarter, the Commerce Department reported yesterday, caused in part by the third consecutive quarterly decline in spending on houses and apartment buildings, after several years of rapid growth.

“It hasn’t slowed down a little bit — it has slowed down a lot,” said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, Fla. “Anybody who did not have a shovel in the dirt has chosen to wait till the market settles.”

The housing slowdown is perhaps the clearest effect of the Federal Reserve’s two-year campaign of raising interest rates in a bid to tap the brakes on the economy and reduce inflation. That campaign has been largely successful, with the decline happening gradually while other parts of the economy, mainly the corporate sector, pick up much of the slack.

“Housing is going from being far and away the most important contributor to growth to being a measurable drag, and it’s happening gracefully so far,” said Mark Zandi, chief economist of Moody’s Economy.com, a research company. “But there’s now a growing and measurable risk that things don’t go according to plan.”

The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically. The number of homes for sale has surged in recent months, particularly in once-hot markets, like the Northeast, Florida, California and parts of the Southwest. As builders delay land acquisition and construction it could reduce employment and spending in the coming months.

More broadly, just as rising housing prices during the boom added to Americans’ sense of wealth and well-being — encouraging them to spend more on a variety of goods and services — the reverse could dampen sentiment and lead consumers to pull back on their purchases.

While the fate of housing prices has received far more attention recently than real estate’s role as an engine of job growth, the sector has also become one of the country’s most important industries. Residential construction and all the activity that swirls around it — mortgage lending, renovations and the like — account for roughly 16 percent of the economy, making it the largest single sector, slightly bigger than health care.

It seems to me that with much of the inflation that is driving the Fed's rate increases being caused not by wage growth but by huge increases in fuel prices, that the Fed continues to respond as if it were wage pressures shows either an unwillingness to break from tradition even if that tradition is no longer valid given current conditions, or else it's just another part of the plan to eviscerate the middle class.

According to the New York Times article excerpted above, the housing sector added 1.1 million jobs between 2001 and early last year, while the rest of the economy dropped 1.2 million jobs, which adds yet another dimension to the impact the housing slowdown is going to have on the overall economy.

Increased unemployment in the housing sector, dropping prices, homeowners leveraged up to the peak-price hilt living in what are now overimproved houses, paying adjustable-rate and interest-only mortgages that are getting ready to adjust -- I think you're going to see a lot of Americans losing everything in the next few years.

Oh, and just as an aside? Another oil company, Chevron, posted its second-quarter results yesterday. Profits came in at a record $4.4 billion -- a 19% jump from last quarter. And in the fucked-up world that is Wall Street, the stock dropped $1.68 anyway -- because other companies' profits were higher.