This is the first in a series of articles on why I feel in the next few months a pending crash of the US and much of the global economic system, will become our obvious future to even the most casual observer. I can not precisely time the when but anyone who really looks at trends can see the whys and the whats clearly. These articles will also not be long deep academic dives into these problems, they will be short, common sense looks at what was already going to happen and how our over reaction to Covid-19 has accelerated it.
And you know what, you don’t even have to agree with me that our response to CoVid is an over reaction, you can think it was the right thing or even that we should have locked down harder, it won’t change what those actions have set in motion.
I want to start out by telling you each factor in this series was already a mega trend. We begin today with real estate but there are many other trends we will discuss in future articles. I have been discussing each of these trends for several years on my daily podcast. I’ve stated up until this year that the decade from 2020-2030 would be the the biggest decade of flux that any living person would ever see. Each of the mega trends in this series was already set to drastically shape this decade. The thing CoVid has done is accelerate them all. I now foresee about 85-90% of the shift that was going to take us 10 years, occurring in 2-3.
These shifts were already going to create a decade of extreme flux but we were going to have 10 years to adjust. While many people were going to lose jobs and get hurt the best analogy I can give you is this. We were going to get a direct hit by a Cat3 hurricane, now we are getting a really big, really nasty Cat5 and it is going to hit at high tide and come ashore slowly.
So here is why real estate is going to lead this cascade of economic flux and why it will hurt so bad. Let’s get the first part out of the way, it is pretty simple. The single largest store of real wealth in the US is real estate. Technically stocks are larger but we all know stock values are far more subjective. Real estate is REAL PROPERTY, dirt and buildings. Tangible assets. For most Americans who own homes they are the fall back, “if I get old and run out of money I will sell the house or get one of those reverse mortgage things Magnum PI is always talkin about”.
So when you get a real estate collapse everything else falls with it. Credit dries up, people get stuck in homes, people get under water, people get evicted, credit is destroyed and it keeps going. The chief cause of the 08-09 recession (which long time listeners can tell you I called long before it started) was real estate.
This crash will be worse though a lot worse. It is first aggravated by the recession we are now in, yes in. We are in a recession now, the beginning of them is always pretty mild. Millions are jobless, many of those jobs are not coming back, ever. Moratoriums on evictions have protected renters for a time, they are going to expire and landlords are going into default on their loans anyway. The foreclosures will come next, all of this will look a lot like 2008-11.
It gets worse though when you add the mega trend. That mega trend is two fold, it is a migration out of big cities and a move to remote working which is accelerating the first part of the trend. On top of this is the demographic that most GenX and Boomers still think of as dullard college students living on avocado toast and expensive coffee. Of course I am talking about the Millennials. But folks the average millennial is now in their late 20s to mid 30s with the oldest now having hit the ripe old age of 38!
These kids are no longer kids, they are rapidly heading for middle age, the biological clocks are ticking. Many are actually very well paid and they have adapted to this shift of remote work far better than GenX and let’s face it Boomers are either already retired or ill equipped to adapt to it.
Now though this series I want you to keep the concept of “test drive” in mind. If I want to sell you a car the best thing I can do is get you to come drive it. Well millions of workers just got a 4 month long test drive on remote working. Let me add so did thousands of employers. All the fears that workers would just fuck off all day and not get work done are gone. Those that did that simply get fired and were likely fucking off at the office all the time anyway. Remote work made it clear who the slackers really were, the problem became a solution.
Again this trend was in play, it was going to reach a critical mass about 2024-2026, now it is going to hit it, well, now. And this feeds the migration pattern out of the city. Let me add these millennials are now having kids, getting married, etc. That cool night life in LA or NYC, etc. is no longer what they need. They want a safe street for Billy and Suzy to ride a bike on, etc. This has always been the case but now it is different. Why move 25 minutes out of the city, pay stupid high taxes, risk riots, walk past homeless people shitting in the street and be left unprotected by law enforcement when you do not have to?
The US is a massive nation, millions of homes and lots exist outside of the coastal cities and what always really held people in them was jobs. You can claim it is life style but let’s be honest people in general do not retire and move to such cities do they? People in general (there are always exceptions) do not want giant city life. Most want something in the spectrum of small town to mid sized city living. Well guess what if I can enter data, analyze data, do customer support, run a sales force, etc., from my own home in San Francisco, I can do it from a much nicer and less expensive home in say Tennessee or central Florida.
Now I am not talking about everyone, it does not have to be everyone but last I checked about 13% of those working on site in January of 2020 are now working remote. That is an instant mega trend and many are never going back to on site work. Now we are already seeing the initial exodus as leases age out people are making this move in droves. As soon as the employer green lights keeping the remote work permanent a Uhaul is rented and they are leaving.
This all in the end must cascade! If you doubt this, go to Uhaul.com and price a one way truck from LA to Dallas, then price it one way from Dallas to LA, it will tell you all you need to know. Uhaul knows that if that truck goes to Texas from California, it is never coming back.
Here is how it plays out. Millions of workers leave the giant cities and surrounding suburbs. As they can work remotely they do not go to one region they spread out. Many simply select a climate and area they like, many move back to the area they grew up in to be closer to family. The key is no one region benefits in a big way. Rents plummet (they already are google, “declining rent” if you doubt me) and land lords can’t fill all vacancies. Soon the rent they can get is negative against the debt they must service. Selling their properties gets harder.
As others wish to leave they find their houses are worth far less then they have been told they are worth. They either sell for what they can get, are stranded, get foreclosed on or abandon the mortgage. Driving down all the surrounding suburban prices down even further. Next the companies start selling or trying to sub lease office space but in a decline well their accountants say, “just abandon it, we can deal with it via laws and accounting. Our sub corp owns the property anyway, we will just declare it bankrupt”.
Let me be clear you don’t need an 80% drop in population to destroy prices, nor 50%, nor 20%, frankly 3-5% is bad and 8-10% is catastrophic. That level of lack of demand is devastating in the best markets. But these markets were “fake good”. Bluntly that shitty 1 bedroom apartment was never ever worth 2100 dollars a month. That dinged up old 3/2 home was never worth 750K. It was a phony inflated value all along and in our hearts we always knew it. We just denied it because it was expedient to do so. Now the real value shows, boom!
On top of it, who is leaving? Your most economically productive demographics. Young professionals, middle aged professionals, entrepreneurs and employers. No government or state is equipped to handle this. All government programs are built on eternal growth, it is insane but it is true at the same time. A city like San Francisco, LA, Chicago, NYC, any big city is devastated not only by a drop in population they can’t even thrive if populations are level. Every program, every retirement program, every single thing they do is essentially a ponzi scheme, relying on the ability to take in more tax next year than this year.
Now the bust really comes. Tax revenues fall like a rock, real property prices fall, those that stay protest their taxes and when property values fall this much they win. Cities and counties that don’t accept this and refuse to adjust assessments down find residents join the migration. If they can’t sell at a loss they mail a letter to the bank and a letter to the city telling them to choke on it and leave. It is like a giant octopus eating its own legs.
And this time NOTHING can stop it, because it is a mega trend accelerated by an economic crisis, not an economic crisis caused by some other event. And no GenZ is not moving in to take their place, not anytime soon anyway. Why would they? First jobs will be harder to come by in this new world as you will see with future articles in this series. Next they are broke, far more so then the millennials ever claimed to be. Next all the high tech type employers are moving to remote work and cutting facilities cost.
Lastly, if you live in a smaller area and feel insulated, I agree that you are to a degree but don’t get too comfortable. We are talking long term high unemployment here and many other mega trends quickly on the way. To be totally clear and blunt, I am saying they are very quickly on the way. Real estate in the US is like a woven tapestry, you pull a few threads and shit gets bad everywhere. May be less so in the center but everything takes a hit. Don’t think there can be a recession or possibly a depression, in almost every major US city and it won’t effect you in some fly over state, it just doesn’t work that way.
So my advice is save money and be prepared to get by with less. I know you want more than that, but it is the advice my grandparents who lived though the great depression gave me as a kid, I always followed it and it has always been enough. If you are new around here start listening to my podcast, we get much deeper into resilient life style design on it.
The good news is opportunities will abound, but take your time don’t run out and buy things too quickly let this play out a while, because it will be here a while. Bluntly you want to be fat with cash in the coming years and low on debt. Fortunes were made in the depth of the great depression, they will be made this time as well.
More articles will follow, they will be a lot shorter as this one laid the ground work. If you refer someone to a future article they may need to read this one first. I know some of you will doubt this, it is hard to accept, but I promise you if you investigate my claims about these trends they are not even hard to confirm. I said about 6 weeks ago that this migration and drop in real estate value was coming. I then went on vacation for about three weeks. What I have come back to is every major news source discussing falling rents and people leaving the cities. They are third page stories (in the digital sense, as you have to search for them to find them) but they will soon be on your television nightly news in earnest.
This is all as clear as a sunny day, the only reason many will struggle to see it is all eyes are on Covid for now. Yet as I have been saying for 4 months on the air, “CoVid is killing the dying, and I don’t mean people.”