April 7, 2013

The Thinking That Never Went Away

Readers suggested a topic on the continuing housing bubble. “How long does it really take for the bubble mentality to go away? There has been a slump (long,long overdue) in the sales prices for real estate for a long time in most of the country. There has been an uptick this spring which seems to be attributable to less inventory for sale and some loosening on borrowing standards. I’ll leave the analysis of how much prices have gone up and where and all that to others if they really want to discuss it. You can call it a rebound or a dead cat bounce or a bump on the long road to real affordability or whatever you like.”

“But what I would like to talk about is the attitude. People are talking about real estate investment as if it is the holy grail all over again. I don’t often bumb up against issues connected to real estate investment in my job, but this week the phone has been ringing off the hook and while the issues vary a little, that is the underlying theme. The [people/things/entities/stuff/whatever] my office deals with are all excited about real estate again. And the people calling are not just somebody in suburban wherever who knows how to get the right phone numbers to call but who don’t usually deal with large issues. They are attorneys who work for clients who pay them lots and lots and lots of money just to answer the phone.”

“So, evidently, 7 years or even more depending on how you measure it, wasn’t enough to change the attitude about real estate. [People/things/entities/stuff/whatever] are still looking at it as a font of money from which to drink as long as you get in at the right time. What does it take to pop the bubble in people’s minds?”

A few short replies, “The end of ‘get rich without actually doing any work’ mentality.”

“The water-cooler perception that its participants are losing money.”

“The government to get out of it and quit pushing it like a drug?”

“I’d guess with unprecedented levels of hair-of-the-dog bubble reflation stimulus, it will take a lot longer than it would otherwise.”

One said, “The only thing that will kill the bubble mentality is actual skin in the game. And it has to be skin which is immediately accountable — no pushing it off to the next quarter or the next year or until you retire to Tahiti with a pile and leave the pending losses to your successor. Nope. NOW.”

“Examples: 1. No more mark-to-fantasy accounting where you don’t see a loss until you sell, which allows you to hold of inventory as long as you feel like it. 2. No more deferred interest, like when WaMu would receive a mortgage payment less than interest and book it as fully amortized. Nope, banks should have to treat their checkbooks like any schmo: what you have is only what you have now, not what you think you’ll get later. 3. No more 0% down, you want a house you need real cash now. 4. And NO MORE selling up the food chain scot free for the fees. If you want to sell a mortgage to Fannie, you have to hold a risky tranche for yourself. And yes, that tranche bites into your reserves, so you can only make mortgages until you run out of reserves. No more infinite deals.”

“In other words, if you want to make money on a mortgage, you’ll have to do it the old fashioned way: by waiting 30 years for someone to work it off. That will kill a bubble, and fast. It will also kill the country.”

There was this, “‘Get Rich Quick’ has always held some appeal to people and driven bubble mentalities. Various gold rushes, tulip bulb mania, stock market bubbles, Florida housing bubble in the early 1920s, recent housing bubble, etc.”

“It is tempting to say that the government leaving the lending industry would stop bubble mentality, but I think that’s false. There were housing bubbles all around the world in countries where there was no government loan guarantees. Now, if you abolish the Fed, that might have an impact, since there would be no one to ‘lean against the wind’ with ultra-low interest rates in tough times.”

And finally, “I don’t think the average American thinks that the housing bubble has popped like we do here at the HBB. In my opinion most people view that home prices have gone down and may be they can buy now cheaper as the escalating prices and equity withdrawals would be a safety net. They also believe that owning a home is a path to prosperity. This thinking never ever went away. It is ingrained in their brains. So they are hoping for or almost assured about equity withdrawals in their future all by their own magical thinking.”

“Another reason is that most people do not have anything going for them in their jobs economically speaking. So owning a home is all they have left of an American dream. Being in debt paying for a car or a house they cannot afford is all they can aspire. Without these items they will feel like a big looser. A home to them is a future magical money tree.”

Bits Bucket for April 7, 2013

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