The blame game...comments and ramblings
I don't know how the new BK rules are going to pan out. I don't know if the lawyers are going to find loopholes and exploit the system or not. I don't know if lenders will keep giving 100% I/O loans to borrowers 1-day out of a BK either. I do think it will continue longer than most of us think is prudent or even possible.
I don't know what is going to happen when there are 10's of thousands of homes that are worth much less than the loans on them.
I would like to think the "investor" eats that loss without the government stepping in, but who knows. After all, the government decided to pay for New Orleans homes that did not have flood insurance...what will stop them for doing the same if there is an earthquake in California? Will they pay for the homes where the homeowner decided not to get earthquake insurance? By following the same train of thought...Will the government step in to help people that are upside down on their mortgages?
I sure hope not...but who really knows. It isn't their place to, but history shows otherwise. If enough people are "hurt" by the housing bubble, can you see the politicains pandering to these people for votes as they offer a 'taxpayer' assisted solution to the great mortgage 'crisis' of 2007?? I sure can.
People ask me whose fault I think it is...Greenspan, Bush, media, brokers, realtors, etc. I don't think you can blame any one person for anything this large in scope. Just like I don't think Clinton had much to do with the stock bubble, I don't think Bush had much to do with the RE bubble. Both bubbles are/were fueled by greed and people chasing "easy money". I don't want to make this a political argument....just a mathematical one.
People were buying whatever.com at $200 becaue there was a greater fool they could sell it to at $300. People were buying 1 bedroom condos for $450,000 because there is (hopefully) a greater fool a $600,000. Clinton didn't force people to buy the stocks, and Bush/Greenspan never forced a hand at the doc signing table. Yes, Bush wanted people to own homes, but he sure didn't say to do it with a stated neg-am if that is the only way you can afford it. I'd like to poll borrowers on "why they bought their property". Somehow, I don't think "cause Bush wanted me too" will fall in the top 10. They were not buying a house because of presidentail recommendations. They were buying a house to live in, and/or as the next great asset class that will provide for a retirement with little to no real work. Why keep working a 40k a year job, when you can buy a condo in Vegas, and make twice that much in 6 months of doing nothing???
Midnight infomercials on daytrading stocks as the "road to riches" were replaced with no-money-down property flipping infomercials as the "road to riches". Whose fault is that?? Go to Border's Books or other big book stores. Most will have a special section dedicated to "real estate investing" and it is full of property flipping and "no-money-down" books to read. Again, whose fault is that?!?!?
The media had "skyrocking" .com stocks on the cover of every magazine...just as they had skyrocking property values this time around. So whose fault is that you ask? I say it is the fault of millions of individuals chasing easy money. Nothing wrong with that, but we all know that there is NO easy money in the long term. The irrational behavior becomes euphoric as "everybody" is getting rich. The mentality becomes, "I want to be rich too, so I had better do what they are doing". Forget math...it's different this time!! ...yeah right.
Sure, interest rates and lending standards helped add fuel to the fire, but you cannot blame that on any ONE person, thing, or entity.
If INDIVIDUALS did their own research, crunched the numbers for themselves, they would have seen BOTH of these bubbles clear as day. People assume that because some financial analyst, broker, realtor, media type, or other person "in the know" says it's different this time, that it is. They see that their neighbor made $200k flipping some properties, so it must mean they can do it as well. Yes, those things happened. People made money trading stocks and flipping houses...but the big variable is WHEN did they get in?!?!?
Buying Cisco in 2000 was a different purchase than in 1994. Just as buying condo conversions for $400k is different than buying larger $400k homes back in 1999. Just like the small print on every mutual fund add says "past performance is no guarantee of future results" the same applies to real estate investments as well...even though it isn't written anywhere. At least in the "stock-jockey" profession, anybody with a Series-7 is extremely careful about NOT "promising" or "guaranteeing" future results. In the loan/RE business, it is just standard practice to tell people that RE goes up, and that people WILL have the equity needed to refi when the time comes. People use 100% I/O loans as part of a financial plan to "get out of debt". How you ask? Well, that's easy, buy a property with no money down, come back in 8-12 months and pull out the cash you need to get out of debt...duh!!! I bet you are wondering why YOU didn't think of that "foolproof"plan.
See, that is the problem. People see the completely irrational happen...and think that is the norm. As more and more people see this...it BECOMES the norm....until it reaches a point where even the "greater fool"...isn't.
Looking back, everybody now sees that stocks trading at 180 times future earnings is NOT right...but it sure made sense at the time. As much as people belived "it WAS different this time", by the end of 2000, most realized it wasn't.
I think people will look back a few years from now, and wonder why they thought a $3500 a month I/O payment on a piece of property they could only rent for $1600 a month was a "good deal".
P/E ratios are one of the best ways to value a stock, just as rental income is one of the best ways to value a property. When either of those get out of whack, you will have problems. Just because things have been able to stay out-of-whack for years, doesn't necessairly mean it is a permanent condition.
Again, I just hope the government stays OUT of the equation. Just because the masses are irresponsible financially, does not mean they should be bailed out by the taxpayers. Individuals should be left to suffer the consequences of their actions. I know a lot of people could be ruined for a long time, but that is a better solution than setting a new precedent of using tax dollars to bail out individuals that made poor investments.
I look forward to the comments...