All Recessions are Local

October 19, 2001

Like politics, all recessions are local.

They take root in auto showrooms and appliance stores, then slowly steal into the malls, choking off jewelry stores, stereo dealers, restaurants, clothiers and ski shops before creeping right up to your neighbor's door.

So far, that's the way recession seems to be playing out in my Colorado neighborhood. Perhaps you'll recognize your own in the retail landscape I've described below.

The retail heart of it is a $250 million mall that opened nearby about 18 months ago. The complex was starting to feel the pinch even before September 11, but since then, pedestrian traffic has fallen precipitously. When I took my kids there for ice cream a few nights ago, the main thoroughfare was nearly deserted, and there were no customers at all in many of the luxury-goods shops.

Near the south end of the mall is the shell of a 16-screen AMC theater that is scheduled to open in late autumn. It is no more than three or four miles from an AMC 24-plex and a 12-screen Mann Theater that has been operating in bankruptcy for more than a year.

There are three new brewpubs within this radius, each displaying those huge stainless steel tanks in the front windows. Close by are five or six very large, non-chain restaurants either under construction or recently opened.

One of them sits across a terra cotta plaza from the big AMC -- a fancy Japanese steak house with enough room to easily contain a hockey rink. The space had sat empty for more than a year, just like several other cavernous storefronts that went into hibernation when the giant mall opened just across the road.

Considering the landlord's predicament, the steak house undoubtedly was able to negotiate a very favorable lease. But can it survive? I doubt it. For, every time I've walked by the restaurant on my way to the movies, waiters and cooks have outnumbered diners by more than two-to-one.

A few doors down, on weeknights at least, there are rarely more than faint signs of activity at Dave & Buster's, an expo hall-size adult arcade with sumptuous bars, a restaurant, dinner theater and a billiard parlor. Only the steady hum of electrical current feeding into the video machines, the somewhat disconcerting watchfulness of a very attentive staff, and an occasional ka-ching hint that the place is open for business.

Even that seemingly irrepressible haberdasher, George Zimmer, seems to be dying in this locale. I went into The Men's Wearhouse to buy some slacks not long ago and there were five sales clerks waiting to pounce.

When I returned the next day to pick up the pants after having them altered, the same hungry-eyed bunch were loitering near the tie racks. They briefly snapped to attention before realizing it was just that guy coming in to pick up his slacks.

To round out the picture, I should mention that Qwest Communications, Level 3, Sun Microsystems and IBM are among the biggest employers in this area. All have been hemorrhaging red ink lately, and while their problems may only get a paragraph or two in your local paper, they are big news here.

Which brings us to my neighbor's doorstep, in front of which a "For Sale" sign has hung for nearly two months. Until recently, the guy was a top regional producer for one of the largest retail brokerage firms. He left the company to do financial consulting, but could not have timed the move more poorly. To make matters worse, a big client stiffed him for four months of work.

With savings nearly depleted and a dwindling number of clients to bill, he decided it would be a good time to cash out and rent a home. An appraiser had estimated the value of his house at $450,000 -- nearly twice what he paid for it just a few years ago.

Hard-pressed and sitting on a large capital gain, one could hardly fault him for wanting to take the money and run.

Now, this story by itself would not be that interesting, except there are at least four other homeowners within a stone's throw who have refinanced within the last few months. Moreover, each told me of being helped by an "aggressive" appraisal that was significantly higher than what his or her home would actually sell for these days. And each took out cash as part of the transaction.

Would it shock you to learn as well that two of the homeowners are currently unemployed?

So there you have it. Clearly, the banks have so much cash to heap on mortgage borrowers these days that they seem neither to care whether you have an income, nor to anguish over whether your house is worth anything near its appraisal value.

An ironic twist is that the erstwhile financial consultant has found a lucrative sideline: setting up so-called negative amortization loans for other homeowners. This arrangement allows the mortgagee to pay only the interest on a loan, with the unpaid principal getting tacked onto the balance at the end of the year.

He created five such loans just last week, and I shudder to think of how many other entrepreneurs are doing the same kind of charitable work elsewhere.

In a booming economy, it's not hard to see how such a strategy might tempt imprudence: Buy a house for $300,000, carry it for all of $500 a month, then sell it to the next guy for $450,000.

Unfortunately, it is not boom times but rather the dreadnought of recession that is making this gambit so appealing, if not to say irresistible. Devastated by losses in the stock market and perhaps even jobless, the beleaguered homeowner is capitalizing on the one thing of significant value that he's got left: his house.

But there is no getting around the fact that both he and the lender in effect are betting that housing prices will continue to rise. For if both are wrong, the consequences would be almost too scary to contemplate.

Imagine tacking $50,000 onto your mortgage, even as the value of your home is falling more than 20 percent, from $450,000 to $350,000.

This example may sound extreme, but I believe it has already happened here, if not yet all across America. In fact, $100,000 of vanished equity is a reasonable estimate. For the supposed $450,000 home, it is simply the spread between an "aggressive" appraisal made just a few months ago and the current asking price of a "motivated" seller.

Meanwhile, statistics compiled in Washington deign to suggest that this -- we'll call it a recession -- is different because it has so far miraculously bypassed the housing sector. But if profligate collusion between homeowners and mortgage lenders is the reason, then the economy is going to be in an inescapable bog sooner than any of us could have imagined.

In fact, the mortgage shell game now occurring in thousands of neighborhoods just like mine is all that is keeping the economy from sinking into coma. Ultimately, however, the frenetic hollowing out of homeowner equity can only help to precipitate economic disaster, including the eventual collapse of housing values in the U.S.

I have long predicted that homes would shed as much as 70% of their peak values during the deflation that has recently begun and which should take at least 8-10 years to run its course. Now, however, because of the epic re-financing mania that is taking place, home values are being set up for a much swifter collapse, perhaps over a period of no more than four or five years.

A housing bust would add overwhelming power to a deflation that evidently has already destroyed the economy's ability to respond to either fiscal or monetary stimulus.

Anyone who wishes to understand what is about to happen to the economy should purge the word "inflation" from his mind, since it is no more likely than a heat wave in February. No matter how desperately the Fed may try to stimulate, deflation is now the only possible outcome. As such, we have only just entered a decade of intense and relentless economic pain.

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It is estimated that the total amount of gold mined up to the end of 2011 is approximately 166,000 tonnes.