drhousingbubble.blogspot.com
This is a perfect example of delusion mixed in with a bit of hyperbole. Couple this with a magnificent housing bubble and we have a recipe for ridiculous housing prices. This 464 square foot 1 bedroom 1 bath home, if you can call it that, is being sold for $349,000. When the seller states that this place has "deferred maintenance" I expect all of you readers to open up laughing as if we were on a poorly written sitcom and the canned laughter sign is going off. This is a probate sale therefore the sellers are in a position of power to negotiate especially with a gem like this. And when they say this is in an "upcoming neighborhood" it is like the Captain saying the Titanic hit a minor bump in the water but the trip will continue. I'm not sure what impresses me more, the fact that they can post something like this with a straight face or the fact that these people aren't put into a psychiatric ward for hallucinations. Let us humor this listing and believe that the worth is in the land. Let us take a look: So the median rent is $1,185 and they are asking $349,000? Apparently the upcoming renaissance has deferred appreciation of two decades. Even assuming you bought this place, how much money would you need to put into it to renovate the place? Oh yeah, it is only deferred maintenance so a can of ivory paint and new windows is all we need. This place looks like Uday and Qusay after the friendly confrontation with US troops - they needed deferred maintenance after that encounter as well. What does this example, like the many other fine specimens we have shown tell us about the current state of housing? They tell us many things including one need not smoke crack to be out of their mind.
" "John that is $349,000 worth of LA Housing," as I responded and a quizzical look took over his face. His innate primordial millisecond response was, "Why would someone pay that much for THAT?" I leave that question for all you dear readers to answer.
We can learn a lot from the social sciences especially in analyzing the current housing bubble. Many may see very little connection between housing and social science but behavioral economics and marketing have much to do and say regarding our current environment. This is particularly relevant in analyzing the current housing market because we are in a bubble; and by definition something in a bubble does not follow conventional rules. First, we must ask ourselves how can a relatively stable investment such as housing, become the topic de jour in all investing circles for the past 7 years. Next, we need to ask why housing became such an overnight phenomenon and spread like a blistering hot wildfire.
In examining the housing bubble we need to acknowledge that certain people have a better understanding of the economics behind the housing market. Even though practically 100% of the population lives or rents a home, a very slim proportion actually understand the dynamics of the housing market enough to spread the gospel of housing wealth. From Malcom Gladwell's principles and other sources of behavioral economics we realize that three principles players exist in spreading any social epidemic; and do not kid yourself because we are in an epidemic of biblical proportions. The key players are the housing connectors, the housing mavens, and the housing salespeople. Housing Connectors In every society we have key people who are massively connected in the community. From congressmen to doctors to your local supermarket manager. These people can spread information quickly because they have access to the ears of those who will listen. You can look at the massive growth in MySpace for example. Otherwise a very small and obscure website, a few techies spread the word to key people on college campuses and all of a sudden millions in the population have their face plastered on the internet for the public to see. Those in the housing community known as the housing connectors are the hedge funds, the mortgage back security markets, and the Federal Reserve. The hedge funds played a massive role because they created a market in which trading mortgage backed securities (MBS) was possible. Not only was it possible it was profitable and in a world with low returns, hot money was seeking better yields. Then we have the Federal Reserve dropping rates after the September attacks: If you recall, we did have a very brief recession that was stifled by an absolutely irresponsible monetary policy that created multiple bubbles that we are now dealing with. The Federal Reserve not only dropped key interest rates, they encouraged folks to take riskier mortgages. Good job AG, make a bubble before you hit the public speaking circuit. He would leave you to believe that this did not increase the amount of money flowing to risky mortgages. Take a look at the chart below: The key thing to remember here is the access these connectors have to the public. They are the tip of the pyramid and have a podium to the public. When Alan Greenspan encouraged riskier mortgages he was essentially giving the MBS market a blessing that exotic mortgages were okay. Once this message was processed, Fannie Mae and Freddie Mac felt as if they had a government safety net protecting them in case anything would collapse; The problem with this logic is of course that encouraging unmitigated debt spending would cause inflation and even worse, the bubble we are currently in. Then we have Bush ushering in the patriotic movement that spending was as American as apple pie. I like visuals because they colorfully highlight the credit mess we are in and vividly portray the direct correlation between all these actions.
It is very hard to give someone massive access to credit and suddenly turn off the spigot; have you ever given a child a lollipop and suddenly taken it away? If you have, that's pretty messed up but you will get an understanding of what will happen when the credit lollipop is taken away from the public. Housing Mavens Those that have access to information and massive amounts of information are known as the housing mavens. They spread information because they enjoy educating the public; people that fall into this group are housing/economy bloggers, housing bears, housing bulls, and economist. These people have many listeners but do not have the massive network of the connectors. Initially, there may be some doubt from people catching on to the information but slowly the information traffic picks up. Let us take a look at searches in Google for the past couple of years: You notice a couple of interesting things from the query. First, housing bubble searches peaked in the summer of 2005, which for the nation is about accurate. Many coastal readers are thinking this bubble is over but keep in mind not everyone lives in California, New York, or Florida (our bubble popping is just beginning). As this point trails off you can see the search for "mortgage fraud" nearly converges with "housing bubble." As a bubble peaks, fraud and shyster enter the game because they go to where the money is at. Interesting to see that mortgage fraud rears its public search head about the same time that the housing bubble trend emerges. Let us take a look at another interesting trend that highlights the maven concept: From the above, you can see that many folks started searching for housing blogs starting at the peak of the housing bubble. This interesting growth for alternative media is what is driving a quicker and much more pronounced decline in the housing market. Information travels at the speed of light and people are looking for alternative pieces of media. The benefit of this is that people have options of what they hear. Many mainstream media pieces have been driven by bloggers and housing mavens such as Redfin, who was featured on a 60 Minutes piece arguing against the sacred 6% commission. Housing Salespeople As you may have noticed not everyone cares about the housing bubble. People care more about Paris Hilton or even American Idol.
Given that housing isn't at the forefront of everyone's mind, how did the American public become captivated into this frenzy? These are the agents, bro...
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