Who Won and Lost in the Bubble
It has been over a decade since the Greenspan Fed went full throttle, while other policy makers subsequently went hog wild. Maybe it is time to examine the net results.
There were few big winners. Ironically, none of the big winners was directly related to physical real estate investments. The big winnings came not only from the use of derivatives, but the ability to leverage these derivatives. Unfortunately, these exotic products were only available to the privileged few, to individuals such as John Paulson, who can get Goldman Sachs to customize a package just for them. Not only did they win big, Bernanke came in and honored all the bets with counterparties who obviously had no ability to pay.
Next were the group of executives. The Sanders of Golden West (World Savings) sold perfectly at the top. Angelo Mozilo, who rode Countrywide too long, still walked away with a fortune. Even Franklin Raines received an 8 digit payoff for running Fannie into the ground and sticking taxpayers with a conservatorship. Home builder executives never missed a beat, thanks to endless rounds of government intervention on their behalf.
Wall Street also made a fortune, securitizing junk and selling it as AAA-rated paper. It made fees on top of fees and commissions on top of commissions. Not one of these criminals is in jail.
There were appraisers, mortgage brokers, escrow officers and low level participants who had a few good years feeding off the crumbs. Few walked away from the experience without giving it all back.
At the bottom were the sub-prime borrowers. Interestingly enough, they were not damaged at all. They started with nothing and ended up with nothing. In fact, they enjoyed a few years of home ownership. Many received or are still receiving free housing. A sub-prime credit score turned into a sub-sub-prime one, no big loss there. They lived from paycheck to paycheck before, and that has not changed.
The biggest blow was to members of the middle class, the backbone of society. They were given the false promise of asset appreciation. They were enticed to withdraw equity to fund Greenspan's wealth effect and the consumer economy. Unfortunately, they were suckered into housing debt that put a deeper dent into their retirement fund deficit, with repayment terms well into their golden years. Many are finding that they do not have the time to rebuild their nest-eggs.
This structural damage is what concerns me the most regarding housing in the future. Here is an example of the current bizarre market conditions. Logically, when rates are low and housing is affordable, owner users are willing to pay much higher prices than investors. Today, not only are investors squeezing out owner users, they are using cash. Investors are winning, because owner users cannot afford to pay a higher price. Then the investors will rent to peasants, the same peasants that they overbid against, apparently with the idea they are going to sell to these peasants in the future at an even higher price. Does that sound like something that policy makers wanted to accomplish?
Where does that leave us today? With a weak economy for the foreseeable future, natural economic forces were driving prices down. Policy makers are doing whatever they can to re-inflate the bubble, claiming victory over a little price appreciation, achieved at a huge expense. This is the exact opposite of what they should be doing. Why? Lower rent is better for the economy than higher rent. Lower home prices are far better than higher prices supported by artificially low interest rates. We need to rebuild severely damaged household balance sheets and cash flows. The economy would rest on a much stronger foundation if the masses were not struggling to make house payments, or struggling to pay the rent equivalent.
Wall Street's denizens are once again cheering for any type of asset appreciation, hyping anything they can sell. Yesterday they were pushing Apple and Facebook. Today, they claim real estate is going to the moon. Take a look at this chart of DHI, the biggest publicly listed builder. Do you really think that DR Horton can relive the glory years of 2005 when it peaked at $42 or might it not just as easily tumble to the post Lehman price of under $5?
Who will be the winners and losers tomorrow? Personally, I think it is best that we follow the golden rule that applies when going to Vegas: Do not gamble with what you cannot afford to lose.