Sep 23, 2010

Housing Bubble Rant - My Two Cents

During my usual day to day scanning of real estate and economic news, I came across this opinion article over at Inman news, "When will real estate prices rise? Ask the feds".  The author, Sean O’Toole, makes some points regarding past and present U.S. housing bubbles that brought some underlying frustrations to the surface regarding my personal feelings on "how things really work".  My frustrations are not directed at O'Toole!

Initially, O'Toole asserts that past and present housing bubbles are not the result of "irrational behavior on the part of buyers ...".

Obviously, financial bubbles couldn't be created without a market of buyers buying.  Furthermore, this housing bubble wouldn't have been helped along if buyers didn't get caught up in the buying frenzy based on the "whose house increased in value more in the past two weeks" cocktail party conversations.  "We're all investors now!"  But, let's face it, this is human nature.

As I'm sure many of you have, I've read countless articles and endless reactions by people who elevate themselves to a high and mighty platform to simply pass negative judgement on the vast majority who got caught in this housing bubble / financial trap.  Oftentimes, these very same individuals have what I consider to be an extremely arrogant attitude and a "how is this going to negatively impact me" perspective on many things.  They also tend to bunch everyone into a group of "should have known better", "greedy individuals", whose "stupidity and laziness chasing a cheap buck" is now costing them money through government action bailing out the masses.  Are they right?  Are these "should have known better" people who fell into the trap the real problem?  Is the government to blame?  O'Toole does direct some blame to the government:
"Every single significant increase in home prices in the last 100 years was immediately preceded by government intervention or stimulus. The evidence is irrefutable. Every time the government works to make housing more affordable, prices rise.

This actually makes perfect sense. Buyers always have, and always will, buy as much home as their banker tells them they can afford. If you make home financing more affordable, you increase the amount buyers can pay. But instead of getting more home for their money, prices simply rise to reflect the change."
Let's take O'Toole's point one important step further to illustrate why those with the high and mighty attitudes I described above are, in my opinion, largely off base in attacking the wrong people while giving a pass to those at the epicenter of many of these problems.  On its most basic level, you can deduce nearly any argument down to simplistic, black and white, terms, but, in reality the housing / economic woes are the result of systemic issues now wreaking havoc in this country.  Unfortunately, the overwhelming message and media blitz is to look towards fixing your neighbor to solve the problem.  Businesses walk away from assets each and every day, yet many cast morality judgement and consider their neighbor to be the irresponsible one for walking away from their poorly performing asset.

To illustrate this, let's start with a simple question.  Why wouldn't you buy a house during the housing boom if you had the means?

Housing values were consistently climbing and the access to easy, affordable money, bought you much more.  Unless you are inclined to follow the financial markets / trends on a regular basis, many people wouldn't have been concerned or even thinking about what may happen a few years down the road.  By no means do I believe that ignorance makes for a good excuse, but the reality is that, for various reasons, people aren't informed on many issues.  We see this type of behavior every day on countless topics.  Even though we can agree that people should take the time, the reality is they don't.  Business professionals know this and shouldn't use this angle as a means to exploit the unsuspecting.  However, all too often, they do.  And, those who enabled these exotic loans knew this and used every opportunity to exploit this weakness to generate a dollar.  These enablers didn't do the right thing and inform their clients that the short-term benefits of these types of loans could and, most likely, would turn into a detrimental tool in the long run.  Furthermore, and most importantly, let us not forget that the push to move these types of loans came from the very top echelon of these financial organizations.  Again, it's human nature to trust the experts you turn to.  In fact, I'm sure many of you have been in a situation where you have lost some money because you have gone the extra step to put trust, loyalty, and giving someone a chance, over what you would knowingly consider the "smart" business move.

If you were told, "the loan is good, but beware that ...." many people would have thought twice before proceeding.  Of course, plenty of people would have ignored the caution, but, I believe a larger group would have listened to basic common sense and reason.  If your breaker goes out in your electrical panel and the electrician tells you the entire panel needs to be replaced because there's an inherent fire hazard, would you replace the panel?  Some would, other's would opt to get a second opinion.  If the second opinion came in the same, would you now replace the panel?  Most of the remaining people would based on the advice their trusted experts gave them.  And, this is what happened during the recent housing boom.  The majority of experts you went to, regardless of lending institution, hyped the very same products that are now destroying countless lives.  So let's look at it again.  As a consumer, it appears like the environment to buy a home is good.  Prices are going up, your money is stretching to buy you more, and to verify your sentiments, your mortgage advisor gives you the thumbs up, "I've got just the right mortgage to get you what you want!".  After leaving Wells Fargo, they tell you the same at CHASE, Wachovia, Washington Mutual, Bank of America, and the list goes on and on.

O'Toole finalizes his analysis by stating:
"Hopefully at this point you are seeing a bigger picture. Home-price appreciation is largely just inflation, and housing bubbles are a recurring failure of our government to learn from its past mistakes. Rather than looking at the big picture, government officials and our representatives continue to jeopardize our future with the latest quick fix to a problem they don't seem to understand."
In wrapping up my thoughts, I don't totally agree on this point made by O'Toole.  Yes, the government is involved in pushing through policy, however, who is really influencing our government?  Where do these policies and laws come from?  Doesn't the countless millions of dollars being spent and lobbied every day by the uber / multinational corporations have a major impact on dictating government policy?  How many members on the Hill are influenced to the point where the decisions they make don't necessary fall in line with what would be the best policy for the majority of people?  It's tough to get re-elected these days without a few dollars backing you, isn't it?

At the end of the day, we the people need to address the real problems faced by this country not the contrived crap about your neighbor being the root of your problems because he or she belongs to a different religion, has a sexual preference you're not aligned with, looks differently than you, etc.  This is the smoke and mirrors that the powers at be want us to be consumed with.  When we're arguing amongst ourselves, we don't have time to pay attention to the real issues.  Don't continue to fall for this.  Yes, your neighbor got sucked into the trap, but your neighbor didn't create the environment that enabled the known behavior and certainly wasn't the root cause of this housing / financial mess.

Nobody wants the government involved unless it is an issue that is near and dear to their hearts and promotes their ideology!  "Let the free markets work," they cry!  Wouldn't that be great, a world where the uber / multinational corporations competed in a free market like the rest of us rather than spending unlimited funds to write the laws that enable their predatory behavior and create the market they're looking for.

Disclaimer:  I am a business owner.  My livelihood comes from two CA S-corporations.  I'm not anti-business, I'm anti-unfair monopolistic practices that take advantage of the masses to pad the financial bottom line.  The majority of people work hard for an honest living and I am in business to make money, but not at the expense of using my knowledge and expertise to fool unsuspecting individuals into paying me for a detrimental or unnecessary service.

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