I would imagine there's a few HP'ers out there who suffered through the dot-com bubble - the euphoria followed by the desperation and panic.
I knew more than a few folks who were paper millionaires - and told everyone they knew. These guys worked for dot-coms, and had options that IF THEY COULD EXERCISE 'EM would make them millionaires. I highlighted the words IF THEY COULD EXERCISE 'EM because that's exactly where millions of people around the world find themselves today - with a big fat paper gain on their dot-condo or dot-house, but nobody who'll buy it.
The problem though with this epic Ponzi scheme compared to the dot-com boom and bust is that humans figured out a way to extract PAPER GAIN in the form of cash-out refinancing, or home equity lines of credit.
So paper gains turned into cold hard cash this time around - cash that was used to buy Hummer H2's, nice marble countertop counters and zero-something refridgerators, trips to Maui, and in some cases, hookers and cocaine.
But, as we all know now, this is going to end so badly, so so so badly.
Because that cash didn't come from heaven. It didn't even come from the bank. No, the cash came from the homedebtor's own pocket. He stupidly cashed out a paper gain (rule #1 - never cash out paper gains). He took it from himself, and with interest! And now he has to pay it back, or go bankrupt.
And that's why the Epic Housing Boom will be seen as more destructive, with more wide-spread impact, than the NASDAQ boom. It'll be about fake housing paper gains used to buy Hummer H2s.
October 01, 2006
On paper wealth, dot-coms, dot-condos, HELOCs and Hummer H2s
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27 comments:
So very true I think. But I can't imagine what its going to look like when this all comes together....its going to have to be incredibly messy, but I just can't imagine how much. I think its going to be unlike anything we've seen before.
The Nasdaq bust had very little impact on the overall economy because there was no leverage involved. This housing bubble will be infinitely worse because of all the leverage - not just in housing, but in the entire economy. It was more than just Hummers and vacations, it was lifestyle changes like more dinners out ect, and all those businesses are going to be hurt badly. Not to mention the incredible gov't spending which, along with Greenspan's profoundly irresponsible lowering of the rates to 1% for so long, will be equally to blame. Because when the bubble pops, tax revenues will decline and the deficit will explode right before the boomers retire. This means that tax rates will HAVE TO BE RAISED and interest rates will increase and unemployment will rise and government spending will decline ALL AT ONCE. All this in addition to the fact that the 67% of Americans who've felt rich these last 3 years will suddenly be feeling poor. We're fucked, no ifs ands or buts about it!
This was the famous wealth effect.
Americans, felt more wealthy and spent more. How?
They borrowed against the "equity" in their homes.
The equity was an illusion. Not even a permanent
illusion. Just a temporary illusion. A bubble.
The finance industry facilitated and encouraged the
process of borrowing against imagined new wealth.
Instead of calling all that spending what it was,
debt, increased borrowing, debt spending -- they called it equity extraction, which was false because
it only would have been equity if they had sold their
homes at inflated prices, to really extract equity
people would have had to really sell their homes.
Worse, they coined the misleading label home ATM's
as if people had suddenly found cash in their homes
and could spend their found money using an ATM.
The reality of course is that it was just a massive
debt bubble -- facilitated by the U.S. monetary
authorities, and the lending and real estate industry.
The wealth was phony but the borrowing was real
and it financed a lot of increased spending by
people who felt wealthier and wealthier as the
bubble grew.
Now that the bubble is deflating, those same people
are feeling poorer -- or less wealthy -- and this has
the same effect on spending, only that in reverse as
the bubble had. The banks too will play a big role
in transform the negative wealth effect into less
spending. A recession. During the boom the banks
facilitated the cash for homeowners to indulge in
recreational spending. During the bust phase the
banks will demand that consumers service all the
new debt they have accumulated, and to do that
people are gong to increasingly cut back spending
on everything else. This is a classic cycle of debt,
boom, crisis and bust -- like in latin american
banana republics and old fashioned peso crisis.
Only that this time it's here in America, and the
one caught over-indebted is the American consumer
How soon til we see that on paper wealth, on the side of the street with a For Sale sign on it?
An wagers?
a dotcom bust is one thing, but there are going to be so many more directly involved in this housing paper wealth bust.
I lost some stock value back then but, i didn't live in them either,
The money i had invested was just that, money 'I was willing to gamble' with. If I lost, I lost, but at the same time when my home value doubled, i didn't run out and cash out to buy an overpriced status symbols either!
No, these people will not really feel much pain, and I doubt many will learn any enduring lessons.
The real losers in this game will be average Americans (or Brits) with the good sense to save money and live within their means. There will be a government-sponsored bailout, and we are all going to pay to help the "less fortunate" in their time of crisis.
Vewy welw witten Keiff. It will get vewy messy.
from above:
The government sponsored bail-out for the less fortunate!
Sad but true!
Gee, maybe I should run right out and buy some overpriced home, and get in on the bail-out!!!!
God Bless Amerika
That's right, it's Sunday, so get ye down to The Mall, and kneel before the altar of consumption. We must consume more so China can employ more, and our banks can loan more. A virtuous cycle if there even was one...
I have a bucket of junk silver in my basement. The wife calls it our doomsday bucket. It was worth $3600 when I bought it in 2002. Now it is worth $8200. My math is a bit rusty, but that is about 20% a year in appreciation. You guys with the fancy mortgages, don't stop now, keep up the good work!
Prudent people won't get splattered by it, since if they keep making their payments, they can still live in their houses.
They will lose flexibility if they want to sell the house in order to move for a job change, etc., and that is a bad thing.
The reason people really slam the Cory's of the world is that people who decide to risk it all and lever up, they get to walk away in a bankrupcy since you can't get blood from a stone....
Guy I work with here in Fla., thought a race boat was a good investment.
Purchased in late '05
Not sure for how much?
It's now up for sale for $275k
Surprise, No takers....yet!
How many more are in the same boat.....sorry about that!
Looks like Detroit's Leo the Torch will be hiring a lot of help Countywide in the next few years !
People should really quit smoking in bed with cheap gasoline.
What shocks me is all the really smart people I know who are(were) convinced the RE gains of the last 5 years are built on fundamentals and thus completely expected another 20% appreciation in 2006 and also in 2007.
California is really going to get hit. Anyone with good credit or a stable income took out a ridiculous loan and bought an overpriced house. Homeowners believed the run up was realistic and banked on their gains, cashing out equity to buy home improvements, body improvements, cars, even "investment properties".
People that sold overpriced homes usually used the money to climb up the property ladder. The smart ones cashed out of CA altogether.
Because of the lack of affordable housing and the soaring land values, many businesses have left or have made commitments to leave. The construction industry pickied up the slack, but now that housing is going bust, CA is looking at a grim employment picture. CA's economy is fucked.
"CA is looking at a grim employment picture. CA's economy is fucked."
Guess you Kolyfonians should buy some futures in Astroglide.
"but now that housing is going bust, CA is looking at a grim employment picture. CA's economy is fucked. "
Worse yet, neither of the candidates running for governor out here has a clue about the problem, let alone how to fix it. The politicians beleive that the increase state revenue due to increased home values is going to continue and have already made plans how to spend the money, the same mistake they made durring the dot-com bubble. They never learn.
My neighbor is a mortgage broker. Just became a father. Happy young 27 yr old and now likely a FB. Has no clue. Bought 1200 sq ft. in Mesa, AZ.back in 2005 for 180,000. Just bought a 1700 SQ FT at the new Power Ranch community.290,000.Has not even found a buyer for the home they are moving from. His "rock bottom" is 160.000 since he says he must make 2OK on his house so he can fill his new on with goodies.I saked about the financing and he said 2 year ARM and will lock in fixed in a couple of years. Values are coming up again in Phoenix. Nothing to worry about. All is fine.
What do you think about this guy? Just married , infant, and he works as a mortgage broker in Phoenix!!
UOUCHHHH!!!!!
He stupidly cashed out a paper gain (rule #1 - never cash out paper gains).
Whose rule is this? I wouldn't cash out a paper gain that had interest, but I've cashed out quite a bit in the past few years. In my mind, any time I can turn "hypothetical money" into real money, I'll do it - if it's ethical and doesn't cost too much.
No, I don't have a HELOC. But I don't begrudge anyone who chose to get one instead of selling their home.
Salt Lake Mortgage Blog
"No, I don't have a HELOC. But I don't begrudge anyone who chose to get one instead of selling their home."
Coming from someone who is an advocate for the mortgage industry is reason enough to avoid HELOCs. We will not even get into the common sense arguments about how unwise to take on lifestyle debt just to by a Hummer.
Taking your boring mortgage blog elsewhere! I'm realy going to celebrate when scum like you are out of work.
There's an ole saying in Texas, and probably in Tennessee, fool me once…..won’t get fooled again. (God, I love to watch that one on video, those addled gears grinding and clutch slipping). Point is, unfortunately, looks like we have been fooled again.
Might as well blame it on the baby boomers. The same demographic nonsense that was put forth to justify the meteoric rise of the stock market due to the power of the boomer’s prime year earnings was used to justify the unparalleled demand for housing, as they all sought retirement homes.
Unlike the money invested in the stock market, largely savings hoping to grow to provide a comfortable retirement, the money largely “invested” in this housing bubble is borrowed.
While losses in the stock market may have represented lost opportunity, money lost on housing may ultimately represent a crippling debt for many who thought they were players and stepped up to sign on the dotted line to cash out equity and/or speculatively invest in a “pre-construction” condo or house. In the first case, one might have found that after the stock market corrected that they may not be able to retire millionaire at 45 as they had daydreamed about, the later may result in sleepless nights or nightmares trying to figure out how to come up with tens of thousands to cover an upside down real estate investment. Based on articles I’ve read over the last several years the average person is nearing retirement with $50k or less saved, a RE gone bad may easily exceed that.
Too bad more people don’t share the levelheaded sense of most HP’ers I see posting comments. Instead, too many seem to have been drawn like moths to the flame into housing hell, so easy and painless it was-just sign on the line and the cash is yours. Lulled by the following slogans making people believe they were gonna strike it rich with OPM:
-There are over 75 million baby boomers who are looking for places to retire
-There has never been a national downturn in housing.
-Anyone sitting on home equity is a fool, you need to make that money work for you.
-Immigrants, foreign investors and a growing population will continue drive up housing prices.
-Land, there not making anymore of it, environmental restrictions and other government policies are further limiting development potential.
While a fool and his money may soon be parted, a fool with access to too big a line of credit may soon be in debtor’s prison?
Anonymous said...
"Coming from someone who is an advocate for the mortgage industry is reason enough to avoid HELOCs. We will not even get into the common sense arguments about how unwise to take on lifestyle debt just to by a Hummer.
Taking your boring mortgage blog elsewhere! I'm realy going to celebrate when scum like you are out of work."
Anonymous, obviously you haven't read my boring mortgage blog to know who I am. To broadly categorize everyone in the mortgage business as scum is like categorizing everyone who posts as anonymous as some sort of spineless lurker. It could be that you're not smart enough to know how to set up a profile correctly. Or maybe you're a coward and can't back up your blanket accusations with facts or data. It's just not in my character to judge which of these descriptions fit you.
With respect to other public figures/officials statements being at the polar opposite of prudent or logical, how about Greenspan advocating that people take out adjustable rate rather than fixed rate mortgages?
I know that I'm a simpleton but, it seems to me that if fixed mortgage rates were at, or near, historic lows and credit was readily available, one would want to capitalize on that by locking it in for the next 15 to 30 years when interest rates would...most likely only go up?
Over the same time period savings invested in other forms of investments would likely have a higher rate of return, based on historical patterns, thereby, making the advantage of the low mortgage rate that much more attractive.
It seems as though taking out an ARM for a point or so advantage thinking that you can easily refinance as rates rise is:
1.Assuming that money supply would still be so plentiful and someone would be willing to lend you the money.
2.That the property desired to be refinanced would have economic parameters favorable to refinancing, questionable if originally financed with an 80/20 mortgage or at over 100% of sale price.
To me, it seems as though a good percentage of people who have invested in real estate over the last few years are in for a series of crash courses in the school of hard knocks.
That high end euro-trash suv, the bling, the boat i.e. yacht, speedboat, raceboat,car,motorcycle,
airplane,helo,diamonds,second and third homes, pools, gucci.....
All that overpriced 'Crap' that seemed like a good idea at the time, didn't it?
Can't wait to see the carnage at the 'make offer' sales!
....flea market or garage sale
If they have a garage left!
"Because that cash didn't come from heaven. It didn't even come from the bank. No, the cash came from the homedebtor's own pocket. He stupidly cashed out a paper gain (rule #1 - never cash out paper gains). He took it from himself, and with interest! And now he has to pay it back, or go bankrupt."
That is such a classic quote. Great Job.
Pete
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