I apologize for my dearth of posts lately. I am on two-week vacation visiting family in various Scandinavian countries. I thought I would have more time to post while on vacation, but my schedule has been filled and my availability to wireless connections limited. Frankly, I have too much fun with my family to keep up with this site.
During this vacation, I made a casual, but surprising, observation on the relative cluelessness of Americans on the economic tsunami that is rapidly approaching.
I work in a professional office that has nothing to do with real estate. Since many of my coworkers know that I am an avid (my wife would say obsessed) follower of the real estate market, many come to me and ask me for my opinion on the current market. When they do, I am constantly amazed how little my coworkers know about our current economic situation.
For instance, just prior to leaving on vacation, a coworker asked me if it was a good time to sell her Coral Springs townhouse. I explained that it was a good time to liquidate real estate holdings and remain on the sidelines. However, I explained that it would be extremely difficult to sell her home and she would have to be aggressive with her pricing strategy. When she explained that she purchased her home in 2005, I cautioned her that she would probably have to sell for significantly less than her purchase price. At this point, she instantly doubted my knowledge – she explained that in her neighborhood, prices had not dropped and people were making sizable profits on their sales.
I hate to admit it, but after our conversation, I looked up her property and her debt. Currently there are identical townhouses to hers that had languished on the market for months at prices about 20% below her original purchase price. I also found out that she financed 100% of her purchase with an 80/20 piggyback loan with an option ARM. Simply put, she is a “F@cked Buyer.”
During our conversation, I also noted that she had no idea about the economic pressures on housing. She knew nothing about the subprime mess, the proposed bailout, the securitization of mortgages, the credit crunch, or the global implications of Greenspan’s loose monetary policies over the past decade. Keep in mind, this particular coworker is very well-educated with an MBA from a top school. She is also someone that I consider otherwise intelligent and professionally competent.
But this conversation with my coworker is far from isolated. On a daily basis, I encounter people that know nothing about our economic situation. They know nothing about CDOs, REOs, or ARM resets. Often they make critical financial decisions on real estate, but are completely blind to local ballooning inventories, rapidly falling prices, or the massive overbuilding in South Florida. They buy into Realtor-driven mantras like, “Now is a great time to buy!” Many still think option ARMs are still a great alternative form of financing because of the flexibility they offer.
But, cluelessness on simple economics never surprises me. I realize that I am a geek who follows economic trends as a pastime and do not expect others to do the same. However, on this vacation I have been absolutely shocked by our cluelessness relative to those that I have spoken with here in Scandinavia.
I have repeatedly talked to people here that understand what is happening in the United States. They understand our credit crunch, how we securitized our mortgages, and how our impending ARM resets are only now starting to affect our market. I have seen finance magazines in Sweden, newspapers in Denmark, and local television news programs that have the woes of the American real estate market as their lead stories. They seem far more concerned with our economic situation that we are.
I am not really sure if my casual observation is fair mainly because it is purely anecdotal. Perhaps, my daily encounters with people in U.S. are with people who are excessively ignorant. Or, maybe my talks with family and friends in Scandinavia are with most apt to follow global economic trends. Nonetheless, my personal observation stands – we are collectively more clueless about our own economic situation than our Scandinavian counterparts.
Why is this happening? First, having lived in Europe, I have never bought into the ridiculous notion that Europeans are simply more aware and better educated than Americans. First, Americans are more apt to have university educations and are far more likely to have advanced degrees. Furthermore, there are other issues where I find Europeans are far more clueless than Americans (i.e., entrepreneurship, terrorism, taxation, issues in the Americas, et al). However, this issue is different.
Personally, I think European national media has done a much better job of covering this situation. Their media are much less likely to be influenced by the real estate industry – U.S. Realtors do not threaten their newspapers for reporting the truth. Their media also tends to blame the United States for their own woes – if Swedish banks are getting clobbered because they moronically invested in American securitized mortgages, the Swedish press will make sure to report on our lack of government oversight in the mortgage industry and Greenspan’s reckless monetary policies.
More importantly, I think all populations tend to bury their heads in the sand when facing peril. While my coworker asked me for my opinion on real estate, she really did not want to know her true plight. People who own homes (over 75% of Americans) do not want to hear that their single biggest investment is rapidly losing value. So, we’ll keep our heads buried until the bitter end.
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14 comments:
I will be back on the 27th and will resume normal, daily posting then. In the mean time, I will try to get a post in here and there and keep up with the "Today's Daily F@cked Buyer" feature.
Thank you for your insightful comments.
One question .....
How do you obtain the information about the mortgage on the property?
Like you, I've become a real estate market and macroeconomics junkie. This stuff is just fascinating to me. Watching it play out is far more interesting than any fiction on TV. I’ve also learned more about economics and financial markets in the last 2 years than I ever did in college. Even though it’s mostly just an interest at this point, I feel a lot of practical knowledge will come out of this whole thing that will benefit me for the rest of my life. I’m far more knowledgeable today than I was a few years ago.
I don't remember who made the analogy, but someone said that during almost all bursting economic bubbles, the stages that people go through are similar to the stages people go through when dealing with grief and tragedy (denial, anger, depression, acceptance, etc.). It seemed to fit pretty well.
From the market peak (mid-2005) until about mid-2007 (when the whole mortgage mess started to dominate the news), I would say that Americans were mostly in denial. And of course, most of these people that remained in denial had some personal stake in the issue. Even a person who owns a home free-and-clear doesn't want to believe their "nest egg" home is shrinking in value. So, I understand why the majority of Americans have some reason to want the housing bubble to stay inflated.
Added to the problem was the fact that the mainstream media was constantly quoting shills like David Lereah talking about “soft landings”, and these incredibly flawed housing price indexes showing minor drops in median price or even gains where, in fact, there were huge declines.
European news media does strike me, for the most part, as more level-headed. However, from what I gather, this real estate bubble was global. There were flippers on every continent. And as we’ve seen from the examination of the derivatives markets, what’s bad for America is bad for everyone.
However, it does seem that, for the most part, Americans are now starting to move past the denial stage (as far as real estate goes). Sure, there are still some people that don't get it and never will. But I've definitely noticed a change recently. It took a full two years, but I think people are finally starting to see the picture. The fact that all these politicians are running around talking about “bailouts” is evidence of this. When I saw that piece on NBC news about what a mess the Miami condo market is, I felt that the mainstream media was finally starting to shift.
I’ve definitely noticed a difference in all these Internet message boards. The ratio of housing bulls to housing bears used to be like 5:1. Every post by a “bubble-head” or “Benjonesian” would be scoffed at by a bunch of clueless housing bulls. I would say most of the bulls are gone now. You’ll get the occasional troll, but for the most part, the bears have won the battle.
A lot of people seem to understand that the real estate market is in bad shape. However, many of them don't seem to realize how long this will last. It might take another full year before people really “get it”. If past bubbles are an indication, we aren’t going to see bottom anytime soon.
As a side note, I would say that the real denial right now is in the stock market. Anyone who doesn’t think the real estate market will drag the stock market down with it is kidding themselves. All these Wall Street idiots are on the edge of their seats waiting to see what kind of “rate cut” Bernanke will give them. Who cares what the Fed does? They created this mess—you really think they’re going to fix it doing the same thing that created the problem to begin with (lowering rates)? It’s comical.
Almost all the smart people who predicted the housing bubble are predicting a recession, and all the data supports it. We’ve been living in bubble-land so long, we’re overdue for a real recession. It’s coming.
"How do you obtain the information about the mortgage on the property?"
Just go to the corresponding county's "clerk of courts" website (a list of links is on the front page of this blog on the right side of the page), type in the name of the owner of the property, and it will pull up stuff like mortgages, liens, etc.
I became aware of the bubble about two years ago when thoughts of retirement ( three years away) put me in touch with FL real estate. I have many family members in the Tampa area and I wasn't paying attention when new 3/2 homes went from $90,000 (late 1990's) to $ 390,000 (2005). I guess it did'nt matter when my my NY home was pushing $500,000. Thankfully, I will have a pension and never counted on home equity. Which IMO, is why these bubbles have been occurring. There are a lot of fairly high -income babyboomers around and almost no guaranteed pensions. They know it will take millions in savings in order to retire. Hence, the dot.com bubble and then the real estate bubble. People don't want to work till they drop and will jump on any big money bandwagon that comes along. My advice, find the next bubble before it starts and don't get greedy. These economic times will be studied for centuries.
The message I hope people get is that the cure may be worse than the illness.
By that I mean if a homeowner gets "bailed out" they are chained to a property that will be worth 50% of what they owe the bank.
Once again the homeowners will bite the bullet and take the beating to save the banks.
Who among us really believe the bailout is for the little guys and NOT the BANKS?
If a homeowner walks from the house, files bankruptcy in seven years he can buy his house back for 50% of what he owes.
All the while renting for a fraction of what he is now paying.
Nice blog
I am from Sweden. I think the biggest problem is that America has no recent experience with real estate bear markets. I lived through a bear market in real estate in the late 80s in Sweden. It took prices down 50% in some areas. I don't feel that there is any preparation for how bad it can get. People on most levels seem to think that we are looking at 5-10% decrease. It can and I believe will get much worse.
Of all the things Mr Greenspan did that one can consider almost evile, ( the printing of money thereby being a part of a giant tax increase on people, or being part of the Reagan spending spree which guarantees higher taxes across the board for generations thereby doing more for the socialist cause than anyone since Johnson and perhaps since Roosevelt, etc etc) you pick out one of the actions he took that HELPED millions of people in aquiring property, that is lowering interest rates.
It's not Greenspans fault that lenders "representatives" who were out for the commission and couldn't care less if loaning people who couldn't afford a home would result in a major financial debacle. How about the politicians who backed such shoddy lending practices?
You don't focus on the cause, you shoot the messenger. In this case you show as much if not more ignorance as the people you claim are ignorant.
"Of all the things Mr Greenspan did that one can consider almost evile, ( the printing of money thereby being a part of a giant tax increase on people, or being part of the Reagan spending spree which guarantees higher taxes across the board for generations thereby doing more for the socialist cause than anyone since Johnson and perhaps since Roosevelt, etc etc) you pick out one of the actions he took that HELPED millions of people in aquiring property, that is lowering interest rates.
It's not Greenspans fault that lenders "representatives" who were out for the commission and couldn't care less if loaning people who couldn't afford a home would result in a major financial debacle. How about the politicians who backed such shoddy lending practices?
You don't focus on the cause, you shoot the messenger. In this case you show as much if not more ignorance as the people you claim are ignorant."
What really sucks about this whole mess is I was the biggest Greenspan fan out there until 2005 when he started to downplay the bubble. Like Greenspan, I consider myself an Objectivist – an Ayn Rand devotee. I always thought that it was amazing to have someone from Ayn Rand’s inner circle running the country’s money supply. Like Greenspan, I also consider myself a Libertarian.
However, agreeing with my personal and political philosophies is not good enough. At the peak of the subprime boom, Greenspan, perhaps the most powerful man in the financial world repeatedly said that there is no national housing bubble. He claimed that it was nothing more than a minor "froth" in some local markets -- nothing more.
Call me a Monday Morning Quarterback, but in 2005, I and many other untrained, amateur economists saw the subprime crisis approaching. We knew there was a national bubble. We knew there were loads of unsustainable loans being given to people who never had a chance of repaying the debt. We knew about the securitization of loans that were being sold to foreign banks and hedge funds. We knew there was a huge affordability gap. We knew that people were using their homes as ATMs, which in turn was driving the booming economy. We knew the collapse was coming. We knew this simply by watching, observing, and reading the various blogs that were popping up all over the Internet.
Yet Greenspan, the man who is appointed to oversee our banking system, had no freakin’ idea? He thought this was a merely “froth” and would remain substainable in all but the most “frothy” markets? How could Greenspan be so freakin’ clueless when so many amateurs saw this coming?
Incidentally, I do blame President Bush, Secretary John Snow, and Congress for being complicit. They also should have known this was coming. They also should have taken action.
However, Greenspan had the primary charter of overseeing our monetary system and he did ABSOLTUELY nothing. He didn’t tighten the monetary supply significantly when things got out of control. He didn’t go to Congress and demand they take action. In fact, he did the exact opposite. He went before Congress and claimed that there was no national bubble. He downplayed talk of the subprime problem. He assured Congress that all was well when clearly it was not well.
Who else should take primary blame?
"I am from Sweden. I think the biggest problem is that America has no recent experience with real estate bear markets. I lived through a bear market in real estate in the late 80s in Sweden. It took prices down 50% in some areas. I don't feel that there is any preparation for how bad it can get. People on most levels seem to think that we are looking at 5-10% decrease. It can and I believe will get much worse."
Thanks. I agree that the 50% drop in home values in much of Scandanavia has a lot to do with their understanding and awareness of our current problems.
My uncle who lives in Malmo is current selling his home with plans to rent until the current Swedish bubble passes. He expects another 50% drop here.
But, the problems in Sweden and the other Nordic countries back in 1990 is much different than our current situation.
The following article that talks about the Irish housing bubble does a good job of comparing the Japanese and Scandanavian bubble:
Irish Article
I find this quote out of the article extremely interesting especially in contrast to my previous post on Greenspan:
"Japan's biggest problem was that they attempted to sweep the consequences of the housing bust under the carpet. You see, when housing markets go bad, lots of money is lost. Be it homeowners, property investors, developers, banks, and taxpayers, someone has to take the hit."
Isn't that EXACTLY what we're doing in the States? Greenspan, Congress, Bush, Secretary Snow, FAR, NAR, and the rest of the real estate industry certainly tried to brush this housing bubble under the carpet.
Now, we're paying the price.
Yeah, I'll never understand how such seemingly smart people could be so stupid.
What seems so obvious to me and others during this whole thing doesn't even register with Greenspan?
Even Greenspan, who coined the term "irrational exuberance" got caught up in the mania and embraced the 90's stock bubble right before it popped.
How could people, less than 5 years after the NASDAQ bubble, not see that the exact same thing was happening in the real estate market?
We have such short term and selective memories in this country. When I started reading about the hisory of past bubbles like Dutch tulips and "South Seas" stocks, the 1960's "-tronics" bubble, 1980's biotech bubble, etc., I concluded that there must just be something about human nature that causes us to continually ignore history and get caught up in these bubbles.
I'm sure that 5 years from now we'll be talking about some other bubble that is about to pop. It's an endless cycle, it seems.
If you can see the bandwagon, you're too late.
"Like Greenspan, I also consider myself a Libertarian."
LOL. Greenscam isn't a 'Libertarian' he's a Republican hack.
"LOL. Greenscam isn't 'Libertarian' he's a Republican hack."
The same Greenspan that was twice appointed to the Fed Chair by President Clinton? The same Greenspan that has been extremely critical of the war in Iraq, the Bush tax cuts, and viritually everything else Bush has done?
Man, if he's a Republican hack, I hate to see a Republican opponent!
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