Friday, August 14, 2009

Hot Potato Homes

Rising home prices were stupid. Done.

Wtf do you mean I should explain? Fine.

Buy a house, and presumably the land under it. Five years later it's worth more. Makes sense, right? Well, let's run it through the two tests: added value and supply/demand.

Added value
Did you fix up the home? Was it enough to raise the price by whatever amount?
Maybe not. But maybe the neighborhood is better now; perhaps the schools have improved. That's added value, even if you aren't the one who added it. Either way, the home is truly worth more.

Let's look at the supply side of it. Obviously if the supply goes down, prices will go up. Makes sense. But we had a construction boom, not a mass destruction of homes.

Maybe it's on the demand side. Was there a population surge? Well it did go up, but hardly a surge, and it's always been going up.

Do we suddenly want houses more? I have no clue.

However I've noticed a trend in assumptions: we say "oh they do this or that because they want to" ignoring any other factor. For example, it was claimed that black people are irresponsible for so much conspicuous consumption (as a percentage of income it is unusually, and stupidly, high). Clear proof of poor values and maybe even justification of racism, right? Wrong. In fact high conspicuous consumption is high among the poor and those who are perceived as poor, as a way of demonstrating wealth. Poor white people do the same, though I think it was to a lesser extent, since white people have less 'need' to prove their wealth. So anyway, don't try to explain mass changes with "they wanted to do that."

What could have suddenly made people buy like that? Aha!

Cheap credit and poor understanding of anything relevant to the situation.
- Adjustable rate... that means it goes down, right?
- Why wouldn't home prices keep going up? It's not as if this is the 1920s stock market.
Oh, then there's easy credit: Why would someone give me a loan that I can't afford? Clearly I must be able to afford it.

In the end we had a pyramid. We'd buy overpriced houses because someone else would pay even more in a few years. Then it corrected itself and all that false value went away, resulting in mortgages for more than the home was worth. Here's the scary part: this isn't due to the crash in housing prices: those mortgages were always higher than the home was worth. It was only speculation and ignorance that pushed prices so high.

Short version: homes were not worth more because of reduced supply. They were not worth more because they were better. They were worth more because demand was inflated by terrible loan practices and equally terrible concepts of debt.

In totally unrelated news, after the fact I realized that I probably sounded critical of Governor Sanford. In reality I don't really care all that much. His conduct is his own. My only concern would be use of state funds. And hey, maybe he just had a change of heart and woke up one day thinking "You know, Clinton actually had a pretty good idea" and there you go.


G-Rebel said...

Yeah, I'm not only disabled (bring on the death panel), but I also worked in the mortgage industry during the peak of the madness in one of the most out-of-control markets in the country (now tops in foreclosures, etc).

You've basically got it right, although, as I'm sure you know, the issues run much deeper and complex. From credit markets grading bonds too high, to back-alley deals between mortgage companies and the investors who puchased those loans, to loan officer deceipt of the public, to appraiser fraud, and let's not forget those stupid people who didn't research what was to be the largest and most important purchase of their life because the loan was easy and they were too busy to care...hey, they got their house.

It was bound to collapse. That much corrpution can't last forever, can it? Maybe next time it will, and there will be a next time.

Klepsacovic said...

Everyone does what makes sense to them. Buy low, sell high is impossible though in an inflated market, so it is substituted with buy high, sell higher. Since we're all swept up in it, it looks like buy low, sell high. Then someone goes and points out that the emperor is naked and next thing the house of cards falls down.

Do you still have your job? I know that industry was hit pretty hard, though I can't say I wouldn't mind seeing the financial system overall get chopped down to about a tenth its current size. And no longer counted as part of GDP at all.

G-Rebel said...

Actually, about 2 1/2 years ago, I and 1,000 other people got to work one day, about 2 hours in we were told that the company was out of business and we had to leave. It was bad.

What sucked was that I worked in the Accounting department and knew that money was tight, our credit lines (used to fund customer loans) were tighter and more demanding, so the possibility of failure was in front of us. But after it all went down, the lawyers representing the owners blamed our department for many of the problems, when all along those same owners wouldn't listen to us telling them to stop making such risky loans.

I was also priced out of the local home market in about 30 minutes (no joke). Like a vampire to blood, when people smell riches they tend to act more animalistic and less human. Reform would be welcome.

Klepsacovic said...

I'd call them fools, but the people who fired you probably did run off with quite a pile of cash. What were you supposed to do? If you saw unsafe conditions at a chemical plant you might tip off inspectors or even go on strike, but I imagine either of those would just get you laughed at and then fired.