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Boom Bust

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Jacob Shwartz-Lucas

on 4 December 2012

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Transcript of Boom Bust

Oversupply & Crash Sprawl Development Hooked on rising land values Good
Times Construction Site Bank As land values keep rising, homeowners borrow still more against their real estate in home equity loans. Economic Cycles are Land Cycles As demand for goods and services increases, demand for land increases even faster! Land values rise fast! Land appreciates, not buildings Landowners expect land values to keep increasing. So, they will not sell land for what it is currently worth, but for what it will be worth in the future. The future is now. Development means more tax revenue for cities as they recoup their investment in infrastructure. Resources Land prices have fallen -- but most loans were based on land values at their speculative peak, so many loans default and bank assets fall. The economy tanked... Because the supply of land is fixed -- and it is needed for all production. Any time the economy is growing, land value tends to become a bigger slice of the economic pie. Why? * People often say that "real estate" or "homes" are what's going up in value. But, buildings are material things that wear out.

I can pocket ... the rise in land value! Cities have already provided infrastructure: roads, public transportation, police & fire protection, schools, etc. Infrastructure There's lots of space with plenty of amenities! Yet, because of land speculation, and high taxes on buildings and commerce....

Many urban sites are either grossly underused or totally idle. But people want new homes and businesses.... This leads cities to spread their infrastructure (roads, water, electricity) to outlying areas. If I invest in real estate, land particularly... often with borrowed
money... Construction jobs are plentiful, and this increases demand for goods and services across the board.
Many workers take this opportunity to purchase a new home... All this demand for homes creates an incentive for low-cost, subsidized (and possibly, sub-prime) mortgages. These new sprawl developments vastly increase land prices outside the city. Those landowners clean up (and farmers are pushed farther and farther away). Developers build houses, and commercial buildings, and people start to move in. This new development further increases land values. Business loan? Need a car? Use your land as collateral!
Already have a mortgage? Use your equity to take out another! Local government revenue is growing. Everyone's happy!
The American dream has been achieved! or so they thought... As land values keep increasing, investors get more and more interested in chasing land values. Credit default swaps and other exotic derivatives become popular ways to get on the land-boom bandwagon. Riskier and riskier loans are made. New waves of sprawl development are planned.

New infrastructure for them is provided, as more investors hope to ride the wave. Land immediately available for new sprawl development is oversupplied.

So when that most recent wave of suburban houses fails to find buyers, their value drops suddenly. But -- remember! -- all the borrowing for new construction was financially justified based on the assumption that land values would keep increasing. The fall of land values cascades through the whole area. This can happen so quickly that sometimes new developments are left half-finished. Construction jobs quickly dry up, and this slows demand in many other areas. Unemployed workers can't pay their mortgages. Many default. Sorry, the little cube everyone told you would go up in value forever isn't even worth what you paid for it. You're underwater... Eventually things hit
rock bottom. As the recession grinds on... and on... Bad loans are written off or renegotiated. or... The government tries to stimulate the economy by deficit-spending. or... New technology or globalization opportunities make industry more profitable. or... some combination of factors like these start the bubble inflating again... Times are good! Unemployment is (relatively) low. People can afford stuff and demand is high... People have jobs and homes. Increasing land values are
expected to provide for retirement. workandwealth.com Theory: Lindy Davies
Prezi: Jacob Shwartz-lucas Credit is frozen and so is the economy. *Land can increase in value even if it isn't used at all! It's the land that goes up in value, not the structure. A demographic bulge of more productive younger workers enters the labor market.
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