Saturday, January 21, 2012


On Christmas morning, columnist Tom Friedman (The World is Flat) appeared on Meet the Press and made a comment that resonated with me.  He said, simply, “Average is over.”

Those three words connected deeply with me, because I have been expressing this sentiment in different ways with people for the past three years, especially in explaining why the high end of the real estate market is in such trouble.

In short, average is over. 

What that means is that average people simply aren’t going to have the opportunity to buy $500,000 or $700,000 or $1 million houses any more.  Because of global competition, outsourcing, automation… almost every big company in the world today has opportunities to hire help that is either; a) cheaper; b) more skilled; or c) both.

Because of automation, companies are constantly being presented with ways to increase efficiency by decreasing their overhead, otherwise known as “human capital”.  If you don’t become more efficient, you can’t compete.  If you can compete, you die. 

As more and more “little guys” fail, power consolidates into the hands of an ever-increasingly powerful minority.  This is the underlying premise of Occupy Wall Street. 

And as the overall population becomes poorer, the government fires up the printing presses to keep the masses fed, at the expense of future generations.  This is the underlying premise of the Tea Party.

The conditions that caused higher end housing to be so overbuilt between 2000 and 2007 – namely low unemployment and easy credit – are not coming back.

And so we have hundreds of thousands of homeowners who “overbought”, based on a confidence that no longer exists.  The number of truly qualified buyers who can afford (in today’s economy) to live in $500,000 homes is a fraction of the total number of these homes that were built. 

The result – we’re going to continue to see this sector of the market gradually lose air like a tire with a slow leak.  While there is still some demand for these types of properties, it is simply not commensurate with the supply that is available.  Higher end homes will simply keep deflating until equilibrium is reached with today’s economic realities. 

On my Facebook Business Page this week, I posted that I could sum up the housing market for 2012 in 13 words.  “Entry-level is RED HOT.  Mid-level is OKAY.  High end = PAINFULLY BAD.”

Going forward, everyone is going to need someplace to live.  But that place is likely to be smaller, and the simple fact is that we have way more people living in higher end homes than can actually afford them.