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The Unholy Alliance
by David Stanowski
17 December 2007


The residential real estate business has contributed a great deal to the American economy, and to the comfort and lifestyle of the American people. However, in the years after WWII, developers, home builders, the National Association of Realtors, appraisers, title companies, and other industry groups formed an unholy alliance with federal, state and local governments to promote their business at the expense of the American tax payer, and other sectors of the economy. Recently, some people have started referring to this alliance as the Real Estate Industrial Complex (REIC). 

The REIC has successfully lobbied to get preferential tax treatment, anti-trust exemptions, and tax payer subsidies through government sponsorship of the secondary mortgage market. This has diverted capital into residential real estate, and away from productive enterprises, which is one reason why the number of housing units keeps rising, as the manufacturing and industrial base has been shrinking.

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Many politicians enjoy their membership in this cartel, because they receive generous campaign contributions, to promote the residential real estate business, and they can deliver the pork by helping their constituents buy houses that they can’t afford. Finally, as the government inflates the money supply, home owners can bask in the illusion that their wealth is growing, due to government largess. When times are good, this is a win-win situation for everyone involved, but a losing proposition for everyone else!  


The Galveston chapter of the REIC has helped builders to prosper, while the business community has struggled with an anemic economy. The illusion that the REIC has created prosperity, in Galveston, is much more difficult to maintain than in many other locations. Most of our new housing is not for local residents, so most of us don’t even have the luxury of enjoying a new condo that we can’t afford. We have to settle for the illusion that we are better off as local housing prices rise. Since the economy is stagnant, and local incomes remain very low, this is a tough sell!

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Some members of the local community have been very concerned about the potential fallout from the housing bubble that the Galveston REIC created. They even asked me to present a forecast of the probable collateral damage, from the bubble, to the Galveston Planning Commission. This presentation would NOT have argued that future development should be halted. The data simply show that more building, at this time, would add to the current over supply, which would have negative effects on the local real estate market, and the Galveston economy. The hope was that if our local REIC was still caught up in the delusion that our bubble would never pop, a good dose of reality might get them to rethink their projects, and rein in building on their own.


However, over the last few weeks, the Galveston REIC has gone to a great deal of trouble to delay the presentation of my forecast, to the Planning Commission, which tells me that it is no longer really needed! Their efforts are clear evidence that they no longer believe their own hype, about the local real estate market, so they don’t need me to tell them what they already know. Sooner or later greed always turns to fear!

If the local REIC still felt that the bubble wasn’t going to burst, they would simply let me have my say, and then dismiss me as a delusion kook. This is what the national REIC did, in 2004 and 2005, when anyone stepped forward to say that their “housing boom” was really a housing bubble! Now that their “boom” has burst, they are shamelessly lobbying for the taxpayers to bail them out.

Even though the local REIC is clearly worried that their gravy train is nearing an end, this doesn’t mean that they will change their behavior. They have put all of their financial and political eggs in one basket, and they don’t have any alternatives. If all you know how to do is to build houses, what are you going to do when the housing market is collapsing all around the country?

People have asked me why the Galveston REIC is so concerned about my intended presentation to the Planning Commission; in other words, “What are they afraid of?” Apparently, they simply don’t want anyone to make the case that more building, in the face of falling demand, will probably harm the City. 

If you want to see what all the fuss is about, this is the document that I prepared for the Planning Commission.  


For more information on the Galveston Economy:
 
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