The Madness of American Real Estate

Nothing says “American Madness” quite like the current state of the housing market. It’s amazing how our collective denial has allowed us to watch almost the exact same situation replay itself over and over, and yet still convince ourselves that everything’s going to be fine.

When people speak of the housing bubble, the most frequent argument I hear is “well, this bubble can’t pop, because if there’s a correction in the market, people just won’t sell for a while.”

If everyone in the market simply owned their own home, there would be some truth to that, aside from those that sell out of fear once the market turns downward and those forced by circumstance to move.

Let’s leave the argument that once the market turns, so will the economy, meaning people won’t be able to pay those high mortgages, for another day.

Instead, I want to hone in on the fact that most of the bubble isn’t people just buying a home. Investors have driven this speculative market. These are people buying multiple homes and hoping to rent them and flip them. It’s massive development corporations buying up cute beach houses, leveling them, and putting up McMansions. It’s the same people scared out of the stock market during the dot-bomb.

The nightmare scenario here is that everyone will convince themselves that everything is fine until it’s too late. The developers will continue to build too many new units, the lenders will continue to lend to risky clients, and everyone will tell eachother that things can only continue to go up.

Meanwhile, the market slowly turns south. Warning signs appear. The stock of available housing doubles in 6 months. Prices start to fall, but no one talks about it. All realtors will talk about is how much they’ve made in the past year, and why you should buy now. (After all, they’ve still got a big stock - in fact too many now - houses to sell).

Feel that draft?

Yeah. That’s us with our pants down.

This comment from today’s chatter at “The Housing Bubble 2” is very telling:

At 2:25 PM, NishK said…

Oh, this topic is so timely. We rent in the fiery (literally) North West San Fernando valley (a part of LA). One of our neighbors relayed this anecdote to me yesterday. They have an acquanitance who works as a real estate agent. She is trying to convince them that right now is the best time to buy a house. According to this real estate agent, prices now are stabilizing and will grow further a bit later.

Ready for the kicker - This real estate agent recently SOLD her own house and is now renting in the same complex where we live.

I guess people just can’t stop putting lipstick on this pig.