Bruce B648

Why the Housing Bill Won't Help the Housing Market

We need a larger perspective here. The Internet Bubble broke in 2000 and had 3 legs down into 2002. People used to talk about wave theory regarding stocks. In practical terms this was a succesion of dissapointment spreading from margined portfolios to fully invested portfolios feeling the need to have a cash position to wholesale liquidation by "Long Term" accounts (eg. 401k) when the pain became too great to even open the quarterly statements when they came in the mail.

About this time, wise people like Peter Lynch (remember him) pointed out that the roof over your head was still the best investment that you could make.
Disgusted with the stock market, the public focused on real estate. Former stock market investors started to speculate in housing. Yes, it was more work, but they figured that they were smart enough to pick properties & become landlords, just as they were smart enough to pick stocks & didn't need mutual funds. Rental property prices were bid up beyond that level justified by rents. No problem - we will make it up on appreciation! Real estate always goes up, right?? Interest rates were low due to the recession and 9/11. Vacation homes were bid up as personal finance magazines pointed out that Baby Boomers were nearing retirement. The builders went into overdrive converting farm land, ranches & desert into subdivisions with high levels of amenities (and high association fees). The only problem was that this housing was a greater commute from centers of employment than people had been willing to commit to in past cycles. The builders had a predictable response: Market vigorously - give them soaring ceilings, granite countertops, LIVE ON A GOLF COURSE!! Convince the American consumer that they cannot possibly be happy unless they are living this American dream!! Former stock market investors turned real estate speculators realized that they were working too hard buying existing housing stock. Why not just commit to new construction??
By the time this beautiful new community is 50% built out they can just flip their new home to a buyer who does not want to wait.
That worked so well, lets commit to 3 homes/condos in the next development & make some real money??

Now the perspective. Why does the speculator deserve a bailout??
Why does the greedy builder who convinced every prospective homeowner that they NEEDED granite countertops to be happy deserve a bailout?? (Today there is a story online that granite countertops may emit an unsafe level of radon). They are also typically very dark brown or black. Dark kitchen cabinets were briefly used in the early 70's and became unpopular for decades to come, why are dark countertops the rage?? Could it be because they are imported & expensive???

In my decades as an investment advisor, I have seen many times when the public was late and wrong. It is as if they were looking in the rear view mirror of what they had missed out on & could not take it any longer. So now the public has the big house at the edge of town (or 2 towns away) and not only has to commute but has to pay 50% more for that commute. He can't sell & move closer to work because he was the greater fool: no one has paid more for a home in this subdivision that he did in 2005/6.

This is not just an American problem. England's largest homebuilder is trading at 20% of it's valuation a year ago.

I don't see blogs blaming the builders. I think that they fanned the flames of real estate speculation. They also had the most to gain. The swing factor of disenfranchised stock investors in a low interest rate environment got the ball rolling in 2002-3, however new home marketing (with affiliated financing) lead to the current over-built condition.
The new home builders gained the most & they all sold out at the TOP.

This is much worse than 1991-3. The Savings & Loan industry disappeared at that time. IN TIME, one day, new technologies will provide growth, optimism & hope for those who did not throw away all of their money on a house that they could not afford.
Do not hold your breath waiting for another opportunity to be a real estate speculator in Happy Valley, rather, save your cash so that you can participate in the next Apple, Microsoft of Google that comes out of Silicon Valley.