When Wall Street and Main Street Disagree

It was the best of times, it was the worst of times, these last nine months. Since July, the stock market has increased 29%. Over almost the same period, housing prices have declined more than 5%.

At the end of last week, just before sales of new homes fell again, to more than 80% from their 2005 peak, and on the same day that a new poll showed the man-on-the-street’s economic pessimism hitting a two-year low, the Dow rallied for a 52-point gain.

Wall Street and Main Street have never been so far apart. What’s going on?

David Stockman, the Reagan Administration’s budget director, blames Wall Street speculation. He wrote yesterday that “casino capitalism on Wall Street” is almost unrelated to the “disemboweled, off-shored economy on Main Street.”

But speculation isn’t the only problem. The basis for the stock-market rally is improved corporate earnings, not an influx of speculative capital. Technology, financial services and oil & gas businesses are reporting huge profits.

But all of these sectors are noteworthy for their ability to grow without much hiring. And that’s what these businesses have done, profiting by selling more products yes, but profiting even more by doing that mostly without adding people, handing out raises or otherwise spending more money.

I don’t blame anyone for it, but the latest rally has in effect been a squeeze play. The result is a windfall for stockholders like me, but most of that money hasn’t reached home-buyers on Main Street.

This becomes obvious if you just listen to this Wall Street Journal story of a typical family on the Olympic Peninsula struggling to keep its home: a 14-year-old child dies, the father slips into mental illness, the mother gets cancer and loses her job.

These hardships happened years ago but didn’t take an immediate financial toll on this middle-class family; in 2006 the family augmented its meager income with a second mortgage on their home, which is only now about to foreclose.

It’s a perfect example of how Wall Street has recovered from its excess of borrowing, but Main Street hasn’t. Most people’s credit ratings will be thrashed for years after Goldman and Citi have returned to triple-A status; these folks won’t be buying houses any time soon.

So one reason that housing has declined for everyone except investors — whose activity in the housing market is at an all-time high — is that the would-be buyers of those houses are distressed, too. In most markets, including Atlanta, Seattle, Chicago, San Francisco and New York, price drops have been concentrated in the low- and middle-end.

There are other factors, including the limited liquidity of the housing market and the slow pace of price discovery, the absence of quality inventory as sellers wait for better days and buyers hold out for better deals, but the simplest explanation is that the housing market is down because the middle class is down.

The stock market is up because the upper class is up. Eventually, as we’ve argued before, the money will trickle down and the whole economy will buck up. Already housing is at its most affordable level since 1975. But even so, Main Street can’t always afford it.

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