Green September Burned to October brown Bare November Led to December's frozen ground
Are we entering our Winter of Discontent? A great many people chased the easy money in real estate. Some lost their moral compass (assuming they ever had one,) and many abandoned fiscal discipline in favor living for the day. As a society we are going to pay for the excesses of the Great Housing Bubble with a severe economic recession. For those that were caught up in the folly of the bubble, it will be a very cold winter.
This recession will be severe because consumers, already burdened with onerous debts, will have to cut back spending to pay off their debts and begin saving money. None of this will happen quickly. Imagine you are a typical consumer carrying $20,000 plus in credit card debt, or an additional $200,000 on a mortgage. Now instead of receiving ever-increasing credit card and HELOC offers to fuel consumer spending, you are asked to pay off this mountain of debt. Most are already strapped to make their debt service payments. To come up with an additional $500 per month or more to start paying off debt is going to come out of whatever discretionary income a borrower might have had. This loss of consumer spending is going to depress demand which in turn will put more people out of work which will further depress demand: a downward spiral. Given how long it will take for the American consumer to pay off their enormous debt loads, this deleveraging will serve as a drag on the economy for quite some time. There is no quick fix.
The good news is that the America that will emerge on the other side of this severe and protracted recession will be the America we once knew. We will become a nation of savers who provide the investment capital for business through our savings deposits and stock market investments. Sure there will always be spenders, and many will not make the transition, but this recession will impact the deeply indebted to a far greater degree than it will to those who have minimal debts and who have saved their cash.
In accounting terms, your net worth is the sum of your assets minus the liabilities. Many sought to increase their net worth by taking on huge debt loads to finance assets that were supposed to increase in value. The mass deleveraging has ravaged asset values while having no positive effect on liabilities. If you look at the balance sheets of Americans, those will huge liabilities will be wiped out as asset values decline. Those with few liabilities will likely see a decline in their net worth, but not to the degree of those who are highly leveraged. This recession will cause us all to reassess our relationship to debt. As it should.
Today's featured property was owned by a flipper who took out an Option ARM with a 1% teaser rate to speculate in the real estate market. He had some of his own money in the deal. He watched as his liability grew through negative amortization and asset values crumbled. This speculative flip did not have the desired impact on his net worth.
I was looking through the local rags this weekend, and I was overwhelmed by the number of "you should buy now" articles. There was one titled, "Why you're nuts if you don't buy now." There is no limit to the bull$hit the real estate community can put out there. I would like to see that changed.
The sales tactics of the National Association of Realtors should be examined and potentially come under the same restrictions as securities brokers through the Securities and Exchange Commission. After the stock market crash which helped precipitate the Great Depression, Congress created the Securities and Exchange Commission to regulate the sales activities of securities brokers. There are strict regulations in place governing the representations made concerning the future performance of investment opportunities. These protections were put in place to protect the general public from the false promises made by stockbrokers in the 1920s which many naïve investors believed. The same analogy holds true for Realtors.
The National Association of Realtors has launched numerous advertising campaigns suggesting erroneously that residential real estate is a great investment and appreciation will make home buyers wealthy. The mantra of all realtors is that house prices always go up. There are currently no limits to the distortions and outright lies realtors can tell prospective buyers with regards to the investment potential of residential real estate. Buyers are already prone to believe the fallacies of unlimited riches in real estate, and these fallacious beliefs lead to housing bubbles. Realtors should be prevented from making representations concerning the investment potential of real estate. Since the regulatory framework for this kind of regulation and oversight is already in place under the auspices of the Securities and Exchange Commission, Congress would merely need to make Realtors subject to these regulations in order to solve the problem.
We really need to do this...
Today's featured property is a high-end REO being offered for 25% off its peak purchase price -- a discount greater than $250,000. Is it a good buy? Are you nuts for not buying it? IMO, this house will likely drop another $200,000 in value, depending on how quickly the crash plays out. If I am right, it is not a good time to buy. If the realtors are right, this is the bottom, and it is a great time to buy. Since I have been consistently right, and they have been consistently wrong, you can choose between an impartial observer giving advice based on detailed analysis, or you can place your faith in a group looking to profit off the transaction who have done no analysis at all. You decide.
They say that a good thing never lasts And then it has to fall Those are the the people that did not Amount to much at all
I didn't amount to much... much debt that is...
Isn't this really the siren song of the Great Housing Bubble? Give It 2 Me.
The free money was available, and people took as much as was being
given out. There was no thought given to paying it back because the
house was responsible for that. Five to ten years from now, the houses
would be worth $2,000,000 and we would all be able to finance this sum
by continually rolling over Option ARMs with 1% teaser rates. Now that
this system has come crashing down, perhaps we should just forgive all
this debt and let the irresponsible fools who spent all this money get
a free pass. That seems to be the popular idea with our presidential
candidates. Any politician proposing a homeowner bailout should come
here are read the tales of HELOC abuse and ask themselves if these
people deserve a bailout. If they still think a bailout is a good idea,
you can be sure I will be maxing out my HELOC during the next bubble,
and so will everyone else. (That moral hazard thing is a real pain for policy makers).
In preparing today's post, I looked at several properties. All of them, I repeat all of them, had mortgages in excess of the original sales price.
I usually look for the most egregious HELOC abusers for my posts because they are the most interesing, but today, I am going to show you a typical property that I look at -- an average HELOC abuser.
Monterey
Cypress Publishing Contracts with CreateSpace, Lightning Source, and Ingram
Distribution for Lawrence Roberts’s Book, “The Great Housing Bubble”
Monterey
Cypress Publishing has signed a non-exclusive agreement to print The Great
Housing Bubble with CreateSpace and Lightning Source. The company has also
signed a non-exclusive distribution agreement with Ingram. The book is now
available on Amazon.com, Barnes & Noble online, and in bookstores.
Irvine,
Calif., Oct 9, 2008 –Monterey Cypress Publishing has contracted with
CreateSpace.com, an Amazon.com subsidiary, and Lightning Source, an Ingram
subsidiary, to print “The Great Housing Bubble.” “We are very pleased with these
agreements,” says a representative at Monterey Cypress Publishing, “The
production costs are low, the quality is high, and the service is excellent.”
The
agreement with CreateSpace.com provides for distribution through Amazon.com.
The agreement with Lightning Source provides wholesale distribution through
Ingram. This puts “The Great Housing Bubble” on Barnes & Noble online,
and it opens the bookstore market. “The agreement with Ingram/Lightning Source
is particularly powerful,” says a representative at Monterey Cypress
Publishing, “the Ingram distribution channel gets the book into bookstores and
makes it available to other online retailers.”
Monterey Cypress Publishing, a small press
specializing in real estate and personal finance related books, audio books,
and video presentations, has an exclusive agreement to publish the works of
Lawrence Roberts. His first book, The Great Housing Bubble, details the causes
of this historic crisis.
About the Author, Publisher and
Book
Lawrence Roberts,
author of “The Great Housing Bubble,” is known as the Housing Bubble Cassandra. He publicly predicted the
housing price crash as the primary writer for the Irvine
Housing Blog (http://www.irvinehousingblog.com/). From his unique vantage point
in Irvine, Calif. – the center of the subprime universe – Roberts carefully
documents in his book the conditions and practices that inflated the largest
real estate bubble in history. He holds a Master of Science in Land Development
from Texas A&M University, and he consultants to the land development
industry.
Monterey Cypress Publishing is a small press specializing in
real estate and personal finance related books, audio books, and video
presentations.
Most of the REOs and short sales I have profiled are homeowners or speculators who bought during the bubble. These people either did not live in the house long enough to have a storehouse of memories and attachments, or they did not care about the house at all because it was just a stucco box to trade. When these people lose their houses, they are not necessarily losing their homes. The children's rooms don't have a wall where their child's height has been measured over the years, they don't have a sidewalk with their children's name etched in it, and they did not plant a shade tree in the back yard to enjoy in the future. Some of these stories are sad because many of these families intended to make the house their home, but they did not get a chance. However, today's featured property is something different. It belonged to an owner that got caught up in the fantasies of the bubble, took out all their equity, and lost the family home. A home they had for 17 years...
The complete text of The Great Housing Bubble is spread out over 21 blog posts. Every word of it is there, including the end notes with extra information.
