I live 65 miles from one of the most exclusive mountain resorts in America, and that is Telluride. Telluride, where the rich and famous build multi-million dollar homes with spectacular views, and sometimes occupy them for a mere two or three weeks a year. Telluride, where the bloom was never going to fade, and where extreme prosperity was going to live forever. Prices continually going up, was gospel. Twenty five foot lots going for over a hundred thousand dollars, and no expense spared, the norm. Well, it’s depressionville in Telluride, as well as Aspen, and Vail, two other swank Colorado towns, where the money flows like water or did anyway.
When the stock of a rich CEO or nabob goes from $95 to $2, they have to pull in, and have done so. Some sudden wealth has evaporated like a drop of water on a sun-baked sidewalk in July. Some builders, who built elaborate “spec” homes, just waiting for the next buyer to arrive, are stuck with them, and are, in many cases, going bankrupt, with the holder of the paper re-possessing them. Real estate brokers are offering their services for 2% in some cases, hoping to close a deal. Building permits are way down, and prices of extant homes are being cut right and left to get rid of them. No, they still aren’t bargains, but they are a lot cheaper than before, and going down.
Why do I mention this? Because this has fostered a chain reaction, which is very much evident, not only on Telluride, Steamboat Springs, Aspen, and Vail, but surrounding towns, where the servants and tradesmen live. There used to be a traffic jam on Keystone Hill, leaving Telluride about 4:30PM daily, as the electricians, plumbers, roofers, and carpenters left for home, after a long day of building. No more. Many have been laid off, because few are building. Realtors have laid off sales people, and restaurants have laid off waiters, cooks, and dish washers. Shops are having sales, and the lack of healthy economic activity, has affected everyone in the chain. Laid off employees, contractors, and tradesmen, in some cases, are having extreme difficulty meeting payments, and are conserving their dollars to do so. In other words, the laid off aren’t buying any more than is absolutely necessary for survival.
Gas stations are suffering, because of the lack of round trips of tradesmen, and service personnel. New car sales have slumped, as have sales of building materials, paint, dry wall, insulation, pipe, wire, roofing, and all other building materials. Lumber companies, wholesale electrical, and plumbing suppliers, have laid off clerks and deliverymen. A chain of events has affected every single person involved in these posh towns, and in all surrounding towns. Why mention this? Easy. Because the chain of events, which began in ritzy communities, will surely spread to other communities, as it already has, and this could be the beginning of a real estate downturn in all locations. Telluride, Aspen, Steamboat and Vail are still rich and prosperous, but not nearly as much so. Building is still being done, but at a fraction of the levels of a couple of years ago. The summer festivals still draw crowds, and to the casual visitor, all seems well and prosperous. But the former huge prosperity is absent.
If the tradesmen can’t find a job to replace the ones lost, they might have to sell their residence at a sacrifice, and move to greener fields. If construction slows in other places, manufacturers of building materials will have to lay off, as will distributors, drivers, sales people, and every single employee involved, as well as suppliers to those entities. While building is still going on in my town, in rust belt cities, this is often not true. In my town, real estate, according to my friends who do it for a living, has “leveled off.” A three bedroom, four year old home belonging to a friend, with two car garage, and listed for $156,500 has only been shown once in the last two weeks. Most rust belt cities, have already had this chain of events happen to them. Ohio has lost a quarter million jobs in less than four years. The real estate boom has been kept alive by low interest rates, and the foolish American habit of going into debt, and living beyond, or at incomes. As long as the payments can be made, Americans like to live at the limit. When jobs disappear, payments cannot be made, and economy measures are taken to survive. This means that buying slows, and it is buying, which keeps an economy afloat. If buying slows, or in some places stops, the chain reaction is felt everywhere.
Auto manufacturers, a few years ago, decided that zero percent financing would increase sales, and indeed it did. Car sales zoomed to the heavens, due to it. No more, as the new car demand has been saturated. The zero percent financing still continues, but sales are sluggish, and auto manufacturers and sales forces have laid off employees, with the same chain reaction as has happened in Telluride and others. Low, low mortgage rates have kept the housing boom going. Not only in re-financing, but building new, and purchasing old homes. Will the fed raise interest rates? It is said they not only will, but must, in order to keep foreigners purchasing US debt. If they do, will that knock real estate? It seems to me, that the fed is between a rock and a hard place.
In 1929, when the market crashed, there was no $7 trillion in consumer debt, nor an even higher federal debt. There was no Social Security, with promises to pay of many trillions, with not a dime in the till. There were no credit cards in 1929. As in 1929, huge percentages of Americans own and owned stocks then. When they were wiped out, the chain of events I now speak of began, just as it has now. The rich were the ones wiped out first, and their spacious luxurious homes went on the market, and found no buyers. These posh homes still exist in the poorer neighborhoods of major cities, and have been converted into apartments in most cases, as the neighborhoods went down. By 1932, the depression had been felt by every single American, with an official unemployment rate of 25%, but probably much higher.
When bubbles burst, the results are felt far and wide. Many stock market experts say that the current resurgence in the market is but temporary, because profits are low or non-extant, and P/E ratios are far too high. Richard Russell, the most expert of all, is not optimistic, and I can’t blame him. He says buy gold.
Locally, where I live, the Louisiana Pacific strand board plant, of which I wrote 150 or so columns ago, has never re-opened, and lots of tradesmen, who used to commute to Telluride daily, are looking for work. The chain reaction from a super rich community’s slowing noticeably, has been felt here, and I imagine will pervade the rest of this land, as months pass. It is said that 150,000 new jobs per month must be created for the US economy to live. Such is not even close to happening, other than as illustrated with fake government figures. How many of them were government? Tens of thousands of jobs have been “created,” to examine your baggage and shoes as you attempt to fly. Can this historic chain of events be stopped? Real estate prices in West Denver have declined, and these are fine neighborhoods. Not like Telluride of course, but a decline has begun. Today, there are second mortgages by the millions; and millions of homes are financed, not only to their current value, but in many cases, far above. Is real estate a bubble? The last bubble before disaster sets in? The Durango-Silverton narrow gauge railroad, cut its trains from four to two this past season. The average home price in Durango Colorado, is over $400,000, and is a huge bubble, I am afraid.
Small towns will survive the longest, due to their lack of minority populations, lower crime, danger of terrorism, and generally a more pleasant life style. What will happen to big cities, if a terrorist strike occurs in one of them? Will the exodus increase, as it already has, to a much larger scale? Could this be a reason for large city real estate to go down in price, because of people wanting to get out of them? Prices don’t seem to have gone down in warm climes. Locally, 10 families a month are moving into my town, and the school population went down 50 last year. Are retirees, and people who can make a living out of big cities, moving out to pleasanter places? Has the chain of events as occurred in Telluride, begun in big cities?
Don’t expect truth or help from Uncle Sam, if things go bad or get worse. Uncle Sam caused the 1929 debacle, and never did get us out of it, till WWII began, some say as a deliberate “cure” for the seeming incurable depression. As the markets attempted to recover from the 1929 crash and 1932 bottom, Uncle Sam and the Federal Reserve, did exactly what shouldn’t have been done, and prolonged it.
To quote George Bernard Shaw, “You have a choice between the natural stability of gold, and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold.” Protect yourself.