Dr. Housing Bubble 02/23/09

[Crewleader]

Reconstruction Finance Corporation II: Lessons from the Great Depression. Part XXV: Understanding what we own, Financial History, and the Dangers of Price Floors.

One good thing about the new information age is there is no lack of ideas on how to go about solving our current economic crisis. Yet I am a bit dismayed how some people have suddenly found economic religion yet sat by when the Federal Reserve expanded powers to unprecedented levels and cheered on the first cut of the $350 billion in TARP funds. It is a sort of reverse version of eat the rich where we eat the poor for the ills of our market. Some people are latching on to an idea with iron claws that poor people (aka subprime borrowers) somehow caused this entire global collapse. What is disturbing about this argument is the lack of math and analysis behind it. The amount of subprime loans pales in comparison to the amount of overall mortgage debt, corporate debt, consumer debt, credit default swaps, and other more exotic forms of financial engineered credit products. But some people love a good rallying cry and saying “subprime borrowers caused this problem” is an easy target since most subprime borrowers don’t have access to a public podium.

The argument during the bubble, if you can remember the mania, was that subprime was a tiny niche of the overall mortgage market so there was no need to worry about any market contagion. Subprime was contained and if any problems did occur, it was such a small portion of overall mortgage debt that it was isolated on an economic deserted island. Ironically, most of these people are now arguing that subprime caused all or the vast majority of the market problems. Keep in mind that $7 trillion has been wiped off from the S&P 500 and the United States real estate market has seen $8 trillion wiped away from the peak. Just with the S&P 500 and the U.S. residential market we have seen $15 trillion in wealth evaporate. You mean to tell me that roughly $1 trillion in subprime loans has caused $15 trillion in wealth to disappear? Is it any wonder why so many in our population don’t even understand the basics of Algebra but know who the last American Idol is?

Another interesting thing is occurring and this is more in the social trends department. I’ve talked about a few radio shows here in Southern California that pumped up the real estate market like a used car salesman. These shows normally occurred during the weekend. Well for the last couple of weeks, this regular programming has been replaced with Beyonce and Ludacris. Not sure if this is temporary but many that listened to the show realize how wrong these people were. They not only were wrong they were major cheerleaders for the real estate market for years. They were the real estate carnival promoters. Radio is in it for the money. And I am certain that many in Southern California got sick of hearing people so wrong about the market and probably tuned out.

http://www.doctorhousingbubble.com/

[phantom power]

1. The rich will always blame the poor for their fuck-ups...

And it will always work pretty well, because the poor don't own any newspapers, magazines or radio/TV stations.

[GliderGuider]

2. What this country needs is a good 10 cent scapegoat.

Earlier today I learned the Greek word pharmakos:

Pharmakos (Greek: φαρμακος ) in Ancient Greek religion was a kind of human scapegoat (a slave, a cripple or a criminal) who was chosen and expelled from the community at times of disaster (famine, invasion or plague) or at times of calendrical crisis, when purification was needed.

Sounds like we've decided who our ritual sacrifices will be.

[phantom power]

4. Remarkable -- they didn't mention any decision-makers in that list.

I kid, of course. That's not very remarkable at all.

[Warpy]

3. The radio cheerleaders fed the hysteria

by screaming about how fast prices were going up and convincing people that if they didn't act right then, they'd be locked out of the housing market forever.

I saw the same hysteria in Boston in the mid 80s. I remember all sorts of people going into serious hock and living on brown rice and beans and nothing else so they could buy a condo, often just a freshly painted slum apartment in a 3 story wooden tenement that gave them a combination of the worst parts of ownership plus the worst parts of apartment living. In the late 80s, the bottom fell out and they got stuck in upside down loans for almost a decade.

The Doctor is right about history repeating itself with financial bailouts preceding the kind of thing that will do the most good: public works projects that will put money into the hands of working people so they can pay the damn debt. Even FDR dicked around for almost 2 years trying to support prices by dumping instead of doing the massive public works that eventually got this nation working again.

Undoubtedly the conservatives in both parties will have to do the same stupid things all over again since conservatives don't read history and are incapable of learning its lessons. It's why they always do this to us when they get into power too long.

We've been here before and survived. However, the new country and its economy will likely be quite different from the old.

A whole generation will prosper until the conservatives start to peddle their poison again.

[Joanne98]

5. "Flip this House" is still playing on the cable channels.

You'd think they'd have the decency to cancel the show but NO!

[phantom power]

6. you know, I have to give them credit...

they have at least some episodes where the naive flippers get their ass handed to them. I can recall one where the flippers ended up living in their flip, since they got caught at the peak of the market.

[Warpy]

7. The show is very poorly named

but I guess "Renovate Me" wasn't quite as catchy.

I have no problem with the people on these particular shows who buy distressed properties and do the structural and cosmetic work necessary to make them livable again. These people are providing a useful service and I hate to see them get their asses handed to them.

The real flippers are the ones who bought new construction and sat on it for three years, expecting to turn a profit when they flipped it for resale after 3 years of continued housing inflation. They provided no service to the community and around here, some of the out of state flippers didn't know they needed to turn the heat on in winter, pipes froze and burst, and that housing is now unsalable.

There is still quite a bit to be learned from renovation shows, not the least of which is where to look for problems if you're buying a home for yourself.