A little over a year ago, the Berkeley Daily Planet published an opinion piece where I warned about the dangers of putting too much faith in building condominiums as a means of heading off the home mortgage crisis. At that time, the established media proclaimed that there was nothing to worry about, because the Bay Region was, in the words of one commentator, an “Iron Bubble.” Twelve months later, we are seeing articles in the business press discussing downturns in the condo market. Consider this example from a May 15 article in the New York Times Business section:
“Many of the numbers compiled on home sales specifically exclude condos, which account for one out of eight homes in the nation, and that missing data may be masking just how weak the housing market really is. Sales of existing condo units were down 26 percent in March from a year earlier, compared with an 18 percent decline for single-family homes, according to the National Association of Realtors.”
Closer to home, a recent luxury condo project in Oakland was not able to attract enough buyers at the prices they were asking, and was forced to auction off the remaining units at prices about 30-35 percent lower than what they were asking. I’ve also heard of local condominium projects being put on hold because the financing has hit a snag due to their banks’ speculation in the mortgage market. In addition, the increasingly high cost of living is causing many condo residents to face increasing maintenance costs and other unexpected fees. Even wealthy individuals are now starting to feel the heat. Just witness the travails of certain Hollywood celebrities with foreclosed properties. All now have to face cutting expenses so as to pay off the massive amounts of debt that underpins their way of life.
This crisis first started in outlying areas of our region, such as Brentwood, Tracy, and Vallejo, which were ground zero for selling sub prime loans. A year later, we are beginning to see bankruptcies and foreclosures starting to occur even in pricey communities like San Rafael, Palo Alto, and even right here in Berkeley. The pattern can be described as the fingers of a hand slowly closing in to crush an object. In other words, our time is soon coming. Nevertheless, we still hear from our political and business leaders that all is well, because we live in a very affluent locale, and thus we won’t be too much affected by this downturn, especially cities like Berkeley and San Francisco. And this last week, a recent article in San Francisco magazine proclaimed “Recession? What recession?” After all, aren’t we the place where innovation always triumphs? The Bay Area, we are reminded, is a vital part of the financial industry, and is a major tourism mecca. Anyway, the technology sector will always save us. And if the local economy can’t afford expensive prices, than there’s always foreign investors looking for second homes. Some have even used the phrase “bulletproof” to describe the Bay Area housing market. But the reality is shockingly different. No discussion is made of the massive layoffs that are about to occur in the banking and mortgage sector, Citibank being the most recent example. The gigantic amount of corporate debt is hardly ever discussed in the business press, and the climbing cost of fuel will likely put a crimp in the flow of tourists who travel from abroad. It’s also a fact this financial downturn is a worldwide phenomenon, so overseas investors will be having second thoughts about new purchases of properties. What has indeed happened is that we are at the beginning of the long delayed payback for three decades of feeding frenzy called the consumer economy.
To those who would call me Chicken Little, I’ll offer up this personal story. A decade ago, when the internet craze began, one of my high school classmates founded one of the first internet service provider companies. The quality of its service was excellent, and the company soon became enormously profitable. In a way it could be described as the “Google” of its day. He soon bought a mansion, vacation properties, drove a Ferrari, and lived the high life. Today, he is now on the verge of total bankruptcy. Why did this happen? Because his stock was so overvalued that, even though his company was profitable, it could never reach the expectations of his investors, and the firm quickly collapsed like a house of cards. In other words, the image did not match the reality. Fast forward to today, and we see new millionaires buying new luxury condos and living it up, because, after all, we are in a special part of the country, and it just won’t happen to us here in the Bay Area. Once again, these people are not paying heed to the old saying that wealth quickly gained is soon wealth quickly lost.
A member of my immediate family who has always had a feel for business likens the present meltdown not to a crash, but rather a hemorrhage. Indeed, this debt crisis has been slowly draining our economy of its real assets, setting us up for potential national bankruptcy. And, as in the case of someone bleeding to death, it doesn’t immediately occur to us that we are in mortal danger. The awareness usually occurs when it’s almost too late to do something about it. On that matter, I will offer the same recommendations that I gave in my previous piece. First, we all should pay off or a least lower our debts as quickly as we can. Next, vote out of office those officials who have pushed for these short sighted development projects. And of course, form networks of family and friends who can help each other out in the trying times ahead. I will conclude with a word of advice from the Irish writer Claude Cockburn: “Never believe anything until it has been officially denied!”
John F. Davies is a Berkeley resident.