In recent weeks, the threat of a world financial collapse has dominated the headlines. Banks and other credit institutions have become endangered because the fall in the housing market has destroyed the value of their mortgage-backed securities. Yet, despite a half-trillion-dollar class bailout package mobilized by the U.S. government, and similar moves in Europe, the situation stands to get worse unless we deal with the root cause.
We need to ask ourselves the question: Why has the housing market collapsed? If you want the answer, just follow the money. It’s gone to pay for oil.
Consider: This year, with OPEC-rigged oil prices averaging near $110/barrel, Americans will pay $900 billion for their oil supply, and the world as a whole will pay $3.6 trillion. These petroleum costs are up a factor of ten from what they were in 1999, and represent a huge, highly regressive tax on the world economy. For Americans, the $900 billion oil levy (up from $80 billion in 1999) is equivalent to a 33% increase in income taxes across the board — with sixty percent of the sum being paid over in tribute to foreign governments.
To see how this tax can destroy real estate values, it is only necessary to compare expenditures. In 2003, Americans paid $268 billion for new homes and $197 billion for oil. In 2008, we paid for new homes at an annual rate of $134 billion, with $900 billion for oil. So the increase in our oil expenditures was more than five times as great as the fall in our spending for new homes.
If we consider existing home sales, the pattern remains the same. Because the typical home is held for about 16 years between sales, and long-term appreciation of homes has averaged about 3% per year since the early 1990s, the net additional real estate capitalization due to an existing home sale can be expected to be about 40% of the sales price. Taking this into account along with the new home sales, total net American investment in housing stock went from $785 billion in 2003 to an annual rate of $622 billion this year, a $163 billion decline that is dwarfed by the $760 billion rise in annual oil payouts over the same period.