The Speculative Housing Bubble Mentality Still Governs the Market

The underlying mechanisms for inflating housing bubbles still exist, and the buyer mentality that inflated it still dominates the market. Only lender prudence prevents another housing bubble.

Irvine Home Address … 241 GREENMOOR Irvine, CA 92614

Resale Home Price …… $995,950

{book1}

Nobody asked for life to deal us

With these bullshit hands we're dealt

We have to take these cards ourselves

And flip them, don't expect no help

Now I could have either just

Sat on my ass and pissed and moaned

But take this situation in which I'm placed in

And get up and get my own

Eminem — Beautiful

The housing bubble and the kool aid mindset it spawned has been very disruptive to American life. Large segments of our population are addicted to Ponzi finance, and the prudent are being robbed to pay for the mistakes of the Ponzis. I find the IHB is an outlet for the frustrations with the insanity being inflicted upon us all. The sad part is how little has been done to correct the mistakes. We will do this again.

The Root of the Housing Bubble Remains Unchanged

Charles Hugh Smith (May 27, 2010)

The fundamental root of the housing bubble–the collusion of the Central State and banks to extend home ownership to millions of citizens who did not qualify for that burden– remains firmly in place.

The Federal government continues to pour tens of billions of dollars into … subsidies to Fannie Mae, Freddie Mac and FHA. Mortgage lenders have been delighted to write mortgages in our completely nationalized market in which the government backs literally 99% of all mortgages and the Federal Reserve bought $1.2 trillion in mortgages that no sane private investor would touch.

Fannie Mae seeks $8.4 billion from government after loss: Fannie Mae, the largest U.S. residential mortgage funds provider, on Monday asked the government for an additional $8.4 billion after the company lost $13.1 billion in the first quarter.

Because of current trends in housing and financial markets, Fannie Mae expects to continue having a net worth deficit in future periods and to need to tap more funding from the Treasury.

"Promoting sustainable homeownership and maintaining ready access to liquidity are our guiding principles in serving the residential markets," said Michael Williams, the firm's chief executive.

The government has relied heavily on both companies, which buy mortgages from lenders to stimulate more lending, to stabilize the housing market.

In other words, the housing market would collapse without this massive Federal support, and there is no end to the losses this subsidy will require. Propping up the nation's fundamnetally insolvent housing market is truly a financial black hole.

The props to the housing market provided by the GSEs and FHA are a direct transfer of losses from banks to the Federal Government just like loan modification programs. Whether it stablizes the market or not is yet to be seen. The fact that lenders are being bailed out of future losses is certain. Losses from 2009 and 2010 vintage loans will all be covered by the US Taxpayer.

Meanwhile, the default rate on low-down-payment FHA loans is a staggering 20% on loans written in 2008–after the housing bust had already unfolded and the risk was undeniable: F.H.A. Problems Raising Concern of Policy Makers:

F.H.A. commissioner, David H. Stevens, acknowledged that some 20 percent of F.H.A. loans insured last year — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure.

The Federal government has thus shown that it is so committed to propping up an unsustainable policy and housing market that it is ready to write off 1 in every 4 mortgages within a year of origination.

The problem with that willingness to absorb risk for the sake of incentivizing borrowing for home ownership is that next year another 20% will default, and then the following year another 20% will default, and by year Five the vast majority of those loans backed by FHA will be in default.

The theory is that the FHA buying will become the support the market needs to put in a durable bottom and prevent the 20% default year after year. It might work — if kool aid intoxication can form a durable bottom.

I have always stated it takes cashflow investors with a genuine reason to buy (outside of kool aid intoxication) to bring enough buyers to the market to stabilize pricing. The government has changed the dynamics of the trade. Instead of waiting for cashflow valuations to prompt buyers, the government is handing out 3.5% down payment mortgages and allowing people to take speculative option positions for little cost. The program does not entice cashflow buyers who will withstand a decline in price, it seduces the kool aid intoxicated who will bail if their position moves against them.

FHA Facing "Cataclysmic" Default Rates:

The Federal Housing Administration (FHA) has guaranteed about 25% of all new U.S. mortgages written in 2009, up from just 2% in 2005.

The key phrase here is "borrowing," not "home ownership." The key feature of State support of housing is not legitimate "home ownership," it is the enabling of massive new sources of income and transactional churn for lenders and Wall Street loan and derivatives packagers.

Home "ownership" when there is no equity in the purchase and no equity being built via principal payments is a simulacrum of ownership.

I wrote about this phenomenon in Money Rentership: Housing and the New American Dream. "Since lenders behave like owners of a borrower's real estate, and since lenders have right to force sale if a borrower defaults, lenders are owners, and owners are money renters." A property with no equity position is renting; it is either renting money or renting property. Renting money feels better because at least their is hope of free money later through appreciation.

If a buyer puts almost no money into the purchase–even now, FHA and VA loans can be had with a mere 3% down payment–and the loan is of the interest-only or adustable-rate (ARM) variety favored during the housing bubble's heyday, then there is no principal payment being made and thus no equity being built.

These "buyers" don't "own" anything; all they're doing is renting the money in the hopes that rising home prices will create equity for them out of thin air. What they "own" is essentially an option on a property which they "rent" monthly. If the government manages to reinflate the housing bubble (it won't, but hope and greed spring eternal), then the option will pay off handsomely. The "owner" put no money into the speculative bet, but they can then sell their option for a huge profit.

If housing plummets, then the "bet" was lost. But since "renting" the mortgage didn't cost much more than renting a real house, and there was no capital at risk, then the downside is modest indeed.

The author is aptly describing Mortgages as Options. "Mortgages took on the characteristics of options contracts in the Great Housing Bubble. Speculators utilized 100% financing and Option ARMs with low teaser rates to minimize the acquisition and holding costs of a particular property. The small amount they were paying was the “call premium” they were providing the lender. If prices went up, the speculator got to keep all the gains from appreciation, and if prices went down, the speculator could simply walk away from the mortgage and only lose the cost of the payments made, particularly when this debt was a non-recourse, purchase-money mortgage. Another method speculators and homeowners alike used was the “put” option refinance. Late in the bubble when prices were near their peak, many homeowners refinanced their properties and took out 100% of the equity in their homes. In the process, they were buying a “put” from the lender: if prices went down (which they did,) they already had the sales proceeds as if they had actually sold the property at the peak; if prices went up, they got to keep those profits as well. The only price for this “put” option was the small increase in monthly payments they had to make on the large sum they refinanced. If fact, on a relative cost basis, the premium charged to these speculators and homeowners was a small fraction of the premiums similar options cost on stocks."

In other words, heavily subsidized mortgages at low rates with little money down incentivizes not home "ownership" but speculation in credit-based bubbles.

In the "old days" (circa 1994), the expectation was that equity would be built by paying off the mortgage principal over time. Equity was a result of reducing the mortgage due, not the result of speculative gambling on future asset bubbles.

I wrote about the Ponzis all week. The defining characteristic of housing bubble Ponzis is their belief that income and wealth come with no sacrifice or effort. Free money is showered upon those who speculate by purchasing residential real estate. They don't need to save or be frugal; they obtain all their entitlements through borrowed money rather than industrious contribution to society.

The key feature of middle class wealth is thrift, not massive leveraged debt. What Washington and its financial Power Elite partners presented as "the road to middle class wealth" was in fact a mere chimera, a simulacrum of the road to middle class wealth. That road is fiscal prudence and thrift.

Immigrants have prospered in the U.S. for generations because they were thrifty and sacrificed for their children by sweating blood to save money for college educations and for 20% down payments on homes. They did not prosper by snagging Central State supported mortgages with no down payment on homes they could not afford under any prudent calculation of risk.

From this point of view, the entire "home ownership is for everyone" policy was a gigantic fraud, a con job sold to an American public greedy for a short-cut to middle class wealth. The bankers and the Central State government both profited immensely, as the bankers and Wall Street minted tens of billions in profits off the mortgage machine and its derivative spin-offs, and the government (at all levels, Federal, state and local) gorged on billions of dollars in transfer fees, capital gains taxes and the sales taxes on all the gewgaws home "owners" bought to fill up their new McMansions.

The California Economy Is Dependent Upon Ponzi Borrowers. The transition from a Ponzi economy to a thrift economy will be painful, and the economic malaise will drag on for quite some time.

Today's featured owner spent $360,000 of his middle class wealth

  • Today's featured property was purchased on 6/27/2000 for $610,000. The owners used a $610,000 loan according to my records. It is unusual to see a 100% first mortgage, particularly in 2000.
  • Kool aid did not seduce them until late. On 1/27/2005 they refinanced with a $595,000 first mortgage and a $100,000 HELOC. To this point, the owners were still paying down their mortgage. Apparently, that HELOC got them going.
  • On 9/13/2005 they opened a HELOC for $200,000.
  • On 12/21/2005 the wife borrows $250,000 in a stand-alone second.
  • On 6/29/2006, the couple refinanced with a $900,000 Option ARM with a 2.5% teaser rate.
  • On 8/3/2006, they obtained a $70,000 HELOC.
  • Total property debt is $970,000 plus negative amortization.
  • Total mortgage equity withdrawal is $360,000.
  • They have been squatting since late last year.

Foreclosure Record

Recording Date: 02/09/2010

Document Type: Notice of Default

Debt destruction or wage inflation are the answers

I believe only two reasonable solutions to this problem exist; either the debt gets destroyed through bank write-offs and debt destruction, or workers see massive wage inflation to make the debt affordable.

I have seen many articles suggesting that inflation is the cure, but that isn't accurate. Price inflation in the absence of wage inflation merely lowers everyone's standard of living and would cause widespread debt destruction as the over-burdened are crushed. Wage inflation without price inflation would be a miraculous panacea; house prices could get pushed back up to peak levels, and borrowers would still have disposible income without HELOC borrowing. With massive unemployment, wage inflation does not look iminent, and without it, debt destruction becomes the only viable option.

Short term, expect to see a great deal of squatting while the lenders remain in denial.

Irvine Home Address … 241 GREENMOOR Irvine, CA 92614

Resale Home Price … $995,950

Home Purchase Price … $610,000

Home Purchase Date …. 6/27/2000

Net Gain (Loss) ………. $326,193

Percent Change ………. 63.3%

Annual Appreciation … 5.0%

Cost of Ownership

————————————————-

$995,950 ………. Asking Price

$199,190 ………. 20% Down Conventional

4.94% …………… Mortgage Interest Rate

$796,760 ………. 30-Year Mortgage

$204,815 ………. Income Requirement

$4,248 ………. Monthly Mortgage Payment

$863 ………. Property Tax

$0 ………. Special Taxes and Levies (Mello Roos)

$83 ………. Homeowners Insurance

$78 ………. Homeowners Association Fees

============================================

$5,272 ………. Monthly Cash Outlays

-$1036 ………. Tax Savings (% of Interest and Property Tax)

-$968 ………. Equity Hidden in Payment

$381 ………. Lost Income to Down Payment (net of taxes)

$124 ………. Maintenance and Replacement Reserves

============================================

$3,774 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$9,960 ………. Furnishing and Move In @1%

$9,960 ………. Closing Costs @1%

$7,968 ………… Interest Points @1% of Loan

$199,190 ………. Down Payment

============================================

$227,077 ………. Total Cash Costs

$57,800 ………… Emergency Cash Reserves

============================================

$284,877 ………. Total Savings Needed

Property Details for 241 GREENMOOR Irvine, CA 92614

——————————————————————————

Beds: 4

Baths: 2 full 1 part baths

Home size: 2,794 sq ft

($356 / sq ft)

Lot Size: 5,500 sq ft

Year Built: 1985

Days on Market: 23

Listing Updated: 40311

MLS Number: P733319

Property Type: Single Family, Residential

Community: Woodbridge

Tract: Othr

——————————————————————————

According to the listing agent, this listing may be a pre-foreclosure or short sale.

This property is in backup or contingent offer status.

Woodbridge is most sought after neighborhood with lots of upgrades. The hard wood floors have been refinished. All the room are very spacious, especially the master with a big walk-in closet. The layout is open, light and airy. Downstairs has dark hardwood floors. Upstairs has new carpet. Partial wall removed between two bedrooms to make a two-rooms suite for our kids, which can be easily replaced, this room also has separate door to the master.Ideal for young children.Inside the loop close to elementary school. Four community swimming pools and tennis courts within two blocks (free access to all Woodbridge residents). The South Lake lagoon is a few blocks away, with sand beaches, swimming, small water slides, picnic areas, and boat rentals. This home is in a fabulous school district in an excellent location.Backyard had a covered Saltillo patio; grass and kids play structure. Children play unit built in back yard. Tennis courts and Community pools nearby.

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

33 thoughts on “The Speculative Housing Bubble Mentality Still Governs the Market

  1. winstongator

    You should really isolate the geographic dependence of the bubble. There is a reason that NV & FL have delinquency rates 2X NC’s. Also, you need to compare FHA default rates for 2008 era mortgages to all 2008 era mortgages. The overall default rate is very high, so the 20% number might not seem so dramatic.

    I look at federal intervention as slowing the decline and preventing price undershoot. I think you’ll agree that with or without intervention steady-state pricing is the same. If you shoot below that by 10% or 20% and do it rapidly, you will have more investor opportunities, but you’ll also have a much more severe shock to the economy, higher unemployment, etc. Both paths will get to the same place in the end, it’s just that one path will be much more painful.

  2. John Baker

    I chanced upon your superb blog a few days ago and have read through all of your articles. As a prudent zero debt, high down-payment guy, currently renting because we are in a part of the country we do not want to stay in. I have been feeling like a chump for years. I often wondered how the hell people with salaries lower than mine could afford 500,000+ houses and Mercedes and nice world treking vacations. Well it turns out my suspicions that they couldn’t were dead on. Your casting the entire bubble housing market as a form of speculative futures market is brilliant. I doubt the idiots that bought houses they could never afford and then take ridiculous home equity loans were thinking that deeply but clearly some finciancers were. Keep up the excellent work.

  3. Swiller

    Remember those ads on the back cover of comic books that said you could “Win a $1 Million Dollar Home in California”?

    Well there it is. I think you get bonus package of Rosetta Stone’s when you buy this place.

  4. Planet Reality

    You really need to be more speficin in this discussion regarding investors stabilizing a market.

    There are many cash flow positive markets that investors won’t touch with a 10 foot pole. What percent of US Markets are currently cash flow positive? My guess would be around 80%. Why aren’t the investors stabilizing these markets the way Irvine has stabilized around rental parity? Current trends make this a rhetorical question, the answer should be obvious.

    1. IrvineRenter

      The answer is very obvious: kool aid intoxication.

      Buying on faith when the math says otherwise is emotional foolishness. Further, the markets you deem most secure are actually the most vulnerable because there is no reason other than kool aid intoxication and faith in the market bottom to buy in these markets.

      1. Planet Reality

        I can’t expect you to accept other alternatives. If you want to follow the money over the last 10 years and call it kook aid intoxication I’m fine with that. Better get more sugar and pitchers ready for 4.0% mortgage rates.

        1. IrvineRenter

          I will grant you this, if we see 4% interest rates, house prices will almost certainly rise. Debt-to-income ratios will be astronomical. It will be a permanent embrace of Pozni living by both borrowers and lenders. I don’t want to live and borrow in that world.

          Plus, interest rates that low would also mean a moribund economy where overcapacity exists in every industry and demand is so low that few opportunities exist for investment. If the recession drags on and on, 4% interest rates still won’t excite much activity because nobody is solvent enough to borrow.

          1. Planet Reality

            I partially agree with you. I expect house prices would rise in premium locations.

            I believe house prices in the bottom 50% of locations would continue to fall for the reasons you mention above. I believe the markets in the middle 50-80% range may see flat prices as interest rates fall which is deflationary.

            Irvine is the perfect storm because it is a premium location but the vast majority of homes can still be purchased with conforming loans and most inventory is near rental parity.

          2. Boston2theBay

            Irvine lacks a job engine for the large population it has. Now I think your argument would apply to Palo Alto, Cupertino, Saratoga, Los Gatos, maybe even Santa Monica or Beverly Hills; but given the jobs available within 10 miles of each of the towns I listed relative to their populations, Irvine doesn’t make the cut. Without the jobs, prices cannot be supported.

  5. Planet Reality

    Is it supposed to be a big deal that the house was bought for $610K in 2000 and now 10 years later is offered for $995K? The person who buys this likely saw their income triple in this time period.

    1. christian

      What is the assumption your observation?

      “The person who buys this likely saw their income triple in this time period. “

      So this person made 70,000 in 2000 and bought a 600000 dollar house. With 20% down and if they could get a crazy low rate of 5.5% they would have a payment of 2700 so 47% of their income went to housing in 2000.

      Does that seem a little high?

      1. Planet Reality

        The buyer who is currently under contract on this house may have made $70K or $80K in 2000. That’s speculation.

        Now they obviously make well over $250K with normal lending standard and high cash down payments required.

        The person who bought this house in 2000 made over $100K.

        Welcome to the Ponzi Earth.

        Buying a home like this in Irvine is a bet on the top 20% of incomes.

        1. Boston2theBay

          I agree with income tripling in the last 10 years for skilled individuals. It is also very possible this person’s income tripled yet their job was recently eliminated. Lots of corporate marketing and biz dev types on the streets, not to mention young law associates. Ask any of your friends in commercial RE how their income has been the last few years.

          1. darms

            In 2000 I was making ~$20/hour as an electronics designer w/30 years experience (Austin, TX). 2008 I was making $21.50, not exactly ‘triple’ my 2000 earnings. 2008.May my job went to India & I joined the ranks of the unemployed…

            In 1974 I made $2.35/hour which was a living wage at the time. In 1984 I (finally) made $8.50/hour, that was my one & only ‘wage tripling’.

    2. Overpriced in 2000

      I think this house is not overly over-priced in today’s Irvine market. However, I think it was way over-priced at $610,000 in 2000. And even way way overpriced in 1988 at $524,000. Market value for this house in year 2000 should have been no more than $450,000 to $475,000 max. $524,000 in 1988 is ridiculous.

  6. newbie2008

    Most of FDR’s plans failed and prolonged the depression. The ones that worked are:
    1. Support your friends’ companies
    2. Inflate the currency
    3. Inflate the wages
    4. Continue Hoovers’ grand engineering projects on intrastructure projects, dams, hydroelectric, electric distribution. FDR added park, reforestization.
    5. Encourage global conflicts while selling to both sides.
    6. Do way with most of the TR trust busting.
    7. Social security to appease the working class. A Ponzi scheme, but it will blow up on some other generation.

    Wage inflation is out of the question with globalization and the lack of US unions. The only powerful unions are govt. service workers unions. Most of the others are paper tigers and political lap dogs, who sold out their members.

    Which trick (solution) will be used? Healthcare Ponzi scheme (moved liabilities from the private/corporate sections to the taypayers’ liability — Current plan has picked the worst of both world to blow up on another generation. Why wasn’t the best of the Swiss, Japanese, or Taiwanese systems used?

    I have not seen very many incomes triple from 2000, unless you count in training or school salary as their base for 2000 or banksters’ incomes.

    1. Boston2theBay

      Incomes tripling for skilled professionals in the last decade is one point I can agree completely with PR on.

  7. theyenguy

    They knew: from the top down, that being Alan Greenspan to banking officials, to mortgage officers, to investment bankers. They knew that financial deregulation plus credit liquidity would be a tremendous transfer of wealth to the insightful and well-connected few.

    Until reading here, I lived in ignorance of my Ponzi entitlement — shame on me; there is a price, a loss, to be paid for being simple.

    You write: The props to the housing market provided by the GSEs and FHA are a direct transfer of losses from banks to the Federal Government just like loan modification programs. Whether it stabilizes the market or not is yet to be seen. The fact that lenders are being bailed out of future losses is certain. Losses from 2009 and 2010 vintage loans will all be covered by the US Taxpayer ….. The GSE bail out WILL FALL THROUGH and the Timothy Geithner promised 2010 funding EVAPORATE … One might ask how? I go to Stockcharts.com and look at the chart of IEF, TLT, and ZROZ, that is at the chart of the 10, 30 and zero coupon US Government debt. On Thursday May 27, 2010, it has turned parabolically lower. And today, the 28th, it is barely trading up on a down stock market day. There is a day coming very soon when investors will no longer see US Treasuries as a safe haven investment. There will come a failed US Treasury auction, to be followed by monetization of debt either by money center bank Treasury purchase or printing of money by the Federal Reserve. Either way the US Treasures will further decline in value; soon thereafter funding of the GSEs terminated along with austerity measures imposed on social security recipients: housing values will fall and loan servicers, that is the banks, will turn to kicking out the squatters and begin to leasing the properties.

    The article you provided, stated: Immigrants have prospered in the U.S. for generations because they were thrifty and sacrificed for their children by sweating blood to save money for college educations and for 20% down payments on homes … One such group was the Asians who came to live in the Excelsior neighborhood of San Francisco; the essence of thrifty immigrants who prospered in community is seen in the article Excelsior District Takes Care Of Its Own. The heart of 94112 is Ocean Ave & Otsego Ave; the neighborhood is 44% asian, sometimes called “acculturated asian”, meaning foreign-born and successful here in the US, with two or three generations living in the same and small house.

    You write: Debt destruction becomes the only viable option … My reply is, this is something that the Spanish Central Bank has ordered for the so-called “savings institutions”, called cajas, that underwrote the Spanish housing boom. Ambrose Evans-Pritchard in Telegraph article Spain Orders Banks To Come Clean On Debts To Restore Shattered Faith writes of new rules that target the savings banks or cajas that account for the lion’s share of the €445bn (£377bn) of property debt accumulated during the credit boom, when real interest rates were negative. The new rules will force lenders to write down bad debts within a year instead of stretching out the pain for up to six years. They must set aside reserves on €60bn of foreclosed property still sitting on their books at face value, using a rising scale of up to 30pc. Santander and BBVA have already done this.

    Ambrose-Evans Pritchard relates “Mr Lopez said Spain’s Achilles Heel is private debt of 211pc of GDP. This is much like Britain (213pc), but takes places in the very different context of deflation. Spain cannot easily grow its way out of the crisis because it is structurally overvalued within the EMU.”

    The public and private levels of debt in Spain are terrific levels of debt; debt deflation is the way of the future; debt deflation or as you relate debt destruction will not come easy. It will be wrenching to the very core of human existence.

    Debt deflation, or debt destruction, whatever term one uses, means bank asset deflation to the point where there is no lending; and where as Timothy Geithner held forth in the Financial Times James Politi and Gillian Tett Financial Times article entitled NY Fed Chief In Push For Global Bank Framework: unified regulation of banking globally; yes a one world bank; where one leases property from the bank; the days of mortgage issuance, is just about over, as this world cannot take any more debt.

    Finally, one should consider where your proposal goes. You suggest debt destruction, well there is so much of it, it cannot be destroyed; it must be assigned, yes, all of it assigned universally, that is to every man, woman and child globally.

    1. Swiller

      Yes, all the debt *needs* to be distributed to the peasants so the rich can be comfortable knowing their wealth is untouchable. When will the nations of the world rise against unrestrained capitalism and greed? Hopefully soon.

  8. irvine_home_owner

    In other news, Phase 10 of Sonoma, the homes that started in the mids $700k range five months ago now has it’s largest plan priced at $901k.

    Two significant observations:

    1. I doubt anyone predicted they would be at Phase 10 by this point in time.

    2. I doubt anyone predicted that they would raise prices by $30k in 5 months.

    Where else in Orange County do we see new home pricing act like this? I’ve argued that TIC has a big hand in setting prices which has been countered that it’s not them but the buyers who set the prices. But if the latter is true, then you cannot argue that Irvine does not have some type of premium in order for hundreds of people to pay these kind of prices.

    You need to start writing that second book IR, Irvine’s bubble is still going.

  9. Wage inflation

    I agree with IR that debt destruction is the SOLUTION. I think wage inflation as a solution is like a big shot of adrenaline and steroids to the whole body when the solution should be local. Wage inflation would have to be nationwide while the debt problems are local and more prevalent in the real bubbly states. Debt destruction and price reduction (by market forces) in certain markets is the solution.

  10. DarthFerret

    Some great Alan Greenspan quotes from the bubble days:

    http://www.fool.com/investing/general/2008/10/15/5-alan-greenspan-quotes-that-make-you-wonder.aspx

    Here are some of the best:
    “Even though some down payments are borrowed, it would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity. Many of those who purchased their residence more than a year ago have equity buffers in their homes adequate to withstand any price decline other than a very deep one.” — October 2004

    “Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities.” — October 2004

    Several more at the linked article/post:
    http://www.fool.com/investing/general/2008/10/15/5-alan-greenspan-quotes-that-make-you-wonder.aspx

    -Darth

    1. DarthFerret

      Oh, and perhaps my favorite Greenspan quote of all:
      “We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.”
      Alan Greenspan, March 2004

      -Darth

      1. tonye

        From Albert Einstein:

        “Everything should be made as simple as possible,
        but not simpler”

        Now you know why Economics is NOT a science.

  11. awgee

    “Price inflation in the absence of wage inflation merely lowers everyone’s standard of living and would cause widespread debt destruction as the over-burdened are crushed.”

    Inflation, both wage and price are more accurately described as currency devaluation. Currency devaluation is theft, from those who have purchased US debt instruments and other fixed income savings notes. Inflation is a terrible “solution” to what is actually a debt problem. The only real solution to a debt problem is to pay off the debt. Inflation is pushing off one’s debt onto someone else. It will not cure the problem which is the entitlement attitude of the USA, and unless we pay out debt with productivity and output instead of worthless paper promises, we will bring more destruction onto ourselves.

    The above may sound a bit nutty, but it is what I have been saying on this blog for the last few years. Can you see how it is playing out?

    1. Planet Reality

      People speak too general about both wage inflation and price inflation. Different segments of the population can see wage inflation while others see wage deflation. Price inflation will then vary based on which goods those people purchase. Higher end goods can see higher inflation much like premium real estate markets can see higher inflation based on wage inflation of the segment that purchases these goods. Trends in wage inflation show a median income that is flat while the top 20% have seen significant wage inflation.

  12. awgee

    For those who think that debt destruction is a solution, have you considered what the consequences are to debt destruction through either currency devaluation or default?

  13. Reggie Masterson

    Millions of people are in debt for the same reason: they have the wrong ideas about what they WANT versus what they NEED.. They spend recklessly on their wants, whether on credit cards or in real estate and this obviously has inevitable negative consequences. Until this changes (it probably never will) these problems will persist.

  14. awgee

    “Until this changes (it probably never will) these problems will persist.”

    Actually, it can change, but people need to be educated and understand the differences and similarities between money and currency, and the consequences to using fiat currency.

  15. Bruce

    Real estate mega-firm First American Corp. of Santa Ana is spinning off its property and consumer data business into a separate company, a move designed to increase the value of…

    Thanx
    Bruce

    Buy Leads

  16. cynthia curran

    Irvine doesn’t lack jobs compared to other cities in the region, and Irvine is much smaller than LA and even Long Beach who both have higher unemployment and higher poverty rates. Irvine doesn’t need to produce as much jobs since it is smaller than Sac, San Fran, La, Long Beach, Santa Ana, Anaheim, and Oakland, and San Diego. Probably La which is 4 million has the greatest difficulty producing jobs relative to its size. Most cites over one million due but cities aound the 150,000 to 300,000 range don’t as much.

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