The Ghettos of the Future

“They invited us, hurry and pack up and lets go..the game is on soon.” 

“Alright, alright”, I replied to my boss putting all of the paperwork away.    

It was an autumn day, years ago in Cleveland and a young 22 year old staff auditor named Mike Bechara stopped his grunt work at the command of his “Senior.” 

My boss (a very “seasoned” senior auditor…all of 25 years old) just informed me that we got invited to the Senior Financial Analyst’s house to watch Monday night football.   

My boss drove and followed the other guys from the office in their beat up car.  We wound our way through the streets of Cleveland until we arrived at their place.   

“Wow”, I said getting out of the car, “This is….the ghetto.” 

“I’m sure you have a fine career in real estate appraisal ahead of you…now can we go?” replied my boss with considerable annoyance.   

We followed the other guys into a large house that they were renting.  When we got inside I was struck right away by the grandeur of the place.  There were wide solid wood moldings around the windows and the ceiling was adorned with heavy crown moldings as well.  On top of it all, in the hallway on the way to the kitchen there was a stained glass window.   

“You couldn’t build a house like this now”, I thought, “It would cost a fortune.” 

I asked one of the guys, a native Clevelander, and he said that up until the late 60s, maybe early 70s, the neighborhood was quite affluent and house was representative of that era.  Now?…well now they rent them to recent grads like us that can’t afford to live in a good area.  

When taking risks, one thing you have to watch out for is the tail end of an era.   

“This Bechara is nauseating, he makes one visit to a poor neighbor years ago and he talks about risks like some tough guy”, retort my friends from the peanut gallery.   

Alas, the end of an era usually fools everyone whether the era in question is war, peace, inflation, deflation, or population patterns.   

Examples abound: 

  • Interest rate cycles last 25 years on average.  In the eyes of people born 30 years ago or less, interest rates have always been low and will always be low.  They can’t imagine another world. 
  • When a period of war lasts a long time, people forget that wars suddenly end.  Lebanon was a bad Hollywood joke in the eighties as the civil war dragged on for 15 years.  Very few people positioned themselves for the post war boom in the early nineties when the civil war suddenly came to an end. 
  • Just-In-Time inventory and off shoring of production have been business school gospels for the past 20 years.  Savvy business executives are questioning whether in today’s world of heightened political risk, energy volatility and dirt cheap money, it makes sense to have a very low investment in salable goods and have them shipped from 12,000 miles away to boot.   

Then there is the granddaddy of them all.   

Perhaps the biggest example we can point to is the 50 year trend of middle class Americans living in the suburbs.   

Wait…could this really come to an end?  I mean, can anyone imagine middle class people living in Poughkeepsie, much less Cleveland?

Stranger things have happened my friends.  That old house in Cleveland was inhabited by some very well to do people at one point.  In fact, if you look at mid sized cities across the country from Albany, Danbury, Scranton, to Baltimore, they all have these grand old houses where the middle and upper middle classes once lived.   

It was as recent as the late 60s when the middle classes decamped for the suburbs in droves.  Cheap energy, cheap credit and cheap automobiles made this all possible.  But is there something happening now that could change all that?  

During the recent housing bubble we overbuilt…way overbuilt, our housing stock.  We have decades worth of housing inventory in the form of 3,000 square foot McMansions in exurbs 40 miles from job centers. Millions of pounds of stainless steel, miles of granite countertops and thousands of acres of hardwood floors…that no one will buy.   

Economists call this mal-investment.   

This article in the Atlantic describes suburban neighborhoods in California that are succumbing to abandoned housing and the crime, vandalism and economic malaise that follows. 

Don’t be surprised if those lovely suburban McMansions with their Belgian block driveways, cedar clapboard sidings and bay windows are cut up into apartments in an attempt to make them economically viable.   

It may be the end of the trend of suburban housing and there are certainly risks to those who do not recognize the ground shifting.  But there is also opportunity for the quick witted and strong of heart, for with change comes new prospects.   

So we ended up watching Monday night football in the Cleveland ghetto.  Late in third quarter I noticed they had run low on beer.  Being a good guest, I offered to run out to the store and grab some more.   

“You can’t go out now”, one of my hosts said pointing at the sofa, “Sit down and watch the rest of the game.” 

Thinking he was just being polite, I reiterated my intention to go out and get more beer.  The three guys that were renting the place looked deadly serious at me for a moment.  One of them finally said slowly while shaking his head, “Dude, for-get the be-er.” 

Have a great week, 



Michael Bechara, CPA

Managing Director

Granite Consulting Group Inc.

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