You hear me say that the housing bubble is just a ponzi scheme - the biggest ponzi scheme of all time, the biggest financial bubble in human history.
Well, let's look at what a true ponzi scheme is, and then relate it to the housing bubble:
A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business.
OK so far. "Abnormally high returns ("profits") - that sounds like our friend the bubble. Why work for a living when you can just buy a condo, and earn 20%, 50%, 100% in 2 years? Boy, those are some abnormal returns aren't they?
Especially when you consider the return is much higher than 20%, 50% or 100%. Say you buy a $500,000 condo in Miami, for 5% down or $25,000, and it goes up 50%, or $250,000, heck, even before you move in. So $25,000 to make $250,000, that's 10 times your money! Or a 1000% return! Now that would make Mr. Ponzi smile!And who's paying those returns, those "profits"? Yup, you got it, the "subsequent investors" - the latecommers to the ponzi scheme, the new home buyers, the former renters, the folks getting in with no-down, no-doc, interest-only teaser-rate schemes.
But this is a "real business" isn't it? I mean, like shining shoes, or building widgets, right? Buying a house, that's work, man. I should get paid for my work and labor, right? OK, we all see now that this isn't a real business. There's no work involved. Just riches, or the promise of riches.
Wikipedia finishes with:
A Ponzi scheme must have abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going.
For the housing bubble, the reason it's over now is that the new money in has dried up. The scheme blew up when the expectations of future rises blew up. Now the smart money is heading out, rushing out, and only the terribly stupid are still trying to get in.
So, class is out. I'd encourage you to read the whole wikipedia entry (and also their one for Housing Bubble), and do more research on historic ponzi schemes. This one will be written about for ages, and it's been a fascinating case study all along, but it's going to get real interesting now as it unravels.