It was June and Julie and I were in Phoenix. It was fucking hot, but then again, it’s always fucking hot in Phoenix in June. I was sitting in the back of the car, staring out the window, lost in my own world for several minutes.
“This is going to end badly,” I said to no one in particular.
“What’s going to end badly?” Julie asked.
“This,” I said, waving my arm in the general direction of everything outside the car.
“Could you be more specific?”
“All of these new constructions. Homes going for several hundred thousand dollars. All the new homes being built. This is going to end very, very badly.”
“Why would you say that? The housing market is booming here.”
“That’s the problem. There are a limited number of businesses in this area. In Seattle, there’s Microsoft, Boeing, Amazon, and Starbucks that hire people in white collar jobs. The jobs are relatively stable and it has a trickle down effect on the rest of the area. The housing supply is limited geographically and politically. There are lakes and forest preserves that can’t be built on. Getting a permit is difficult as everyone wants an impact study before anything is built. But Phoenix... Phoenix is different. There are huge tracts of desert, all more or less the same as the other tracts of desert in every direction for hundreds of miles. If a developer buys a piece of land that used to be five miles from Scottsdale, it’s pretty easy to get a permit and start building homes on it. No one is going to stop him. With unlimited land in every direction and pretty loose zoning laws, supply is going to outstrip demand. When that happens, it causes prices to go in the other direction. With a limited number of white collar jobs, the top price is going to reach some kind of asymptotic limit and prices won’t be able to go any higher. That’s when the really bad things are going to happen.”
“What happens when prices start going down?”
“People can start walking away. Homes are not liquid. They can take weeks or months to sell. There’s no real way to value a home, so if a home near your home gets foreclosed on, it has a huge impact on the perceived value of your home pushing down prices further. Do you know what a home is worth?”
“I have a feeling you’re going to tell me.”
“Like in any market, a house is worth exactly what someone is willing to pay for it. No more, no less. You could say the same about stocks of publicly traded companies, but it’s not even close to the same. Companies have earnings and the stock trades at some kind of multiple based on those earnings and the prospects of growth for the company. Since no one can accurately predict what the future will hold for a given company, stocks fluctuate quite a bit as buyers and sellers swap their shares. The buyer believes the company will go up in price while the seller believes the company is fully valued or needs the money. I’ve never had a stock trade that took more than a few seconds to complete as my shares are exactly the same as the other shares being traded. I don’t walk around thinking my shares have a granite counter top or a special, unique view and are therefore worth more than the other guy’s shares. I can check to see what shares of my stock are trading for. I can continue to hold them or sell them based on what the market thinks they are worth. I can look at trailing earnings, management, and growth prospects and try to determine how much they ‘should’ theoretically be selling for. Houses are not commodities. A house that is 2,000 square feet in Scottsdale will sell for more than a similar sized house in Tempe, but there is no accurate way to determine what that price difference should be. Homes sell more based on the homes that sold around them plus some kind of emotional attachment to what the home ‘should’ be. Appraisers are about as useful as astrologists.”
“Plenty of people have been making lots of money buying homes and then selling them a few years later for 50% or more than they paid.”
“That’s the problem, it’s not sustainable. People are making a classic extrapolation error. Taking a few points of data and connecting them with a line and assuming that the line is going to extend forever - up and to the right. This is exactly the same thing that happened in the Internet stock bubble just a few years ago. The thought of not getting in on this boom is driving the prices higher and higher until we reach that asymptote. Of course, no one is going to know what that asymptote is, so builders are going to keep building and there is going to be a huge amount of supply out there. Combine that with the foreclosures that are going to start happening, the housing boom is going to turn into a housing bust and it’s going to get very ugly very fast.”
“So you’re right and everyone else is wrong?”
“Yes!” I said it relieved and enthusiastically. Finally, after all these years of being together, my wife understood me. It’s funny, as someone who uses sarcasm quite frequently, I have absolutely no ability to detect it when other people are being sarcastic to me. The moment I finished saying that one simple word, I realized it. Julie was mocking me, challenging my assessment of the housing market in Phoenix and was no longer interested in hearing my blatherings about markets, economics, bubbles, and the coming apocalypse.
The year was 2004 and I was absolutely convinced that the housing market in Phoenix was unsustainable. I was wrong about a few things, but my overall assessment was right. I was convinced the market correction was imminent, but it went on for several more years. I was convinced that the correction would be painful, but I was not nearly pessimistic enough in how the overall economy would be effected. I thought the housing correction would be more local in nature and not effect my home in the Seattle area.
At the time, I knew nothing about derivatives, credit default swaps, mortgage backed bond securities, the games played by the ratings agencies, subprime loans, and other things that added fuel to the economic fire. It is easy and popular to be angry with Goldman Sachs, the government, “predatory” lenders, banks, Wall Street in general, and others. There is plenty of blame to go around to each of these institutions, but in reality, we as a society need to be honest with ourselves and accept our share of the responsibility.
Every person who took a “liar’s loan” for more equity than they could afford shares in the mess. Anyone who took an ARM, interest only, or negative amortization loan was not “buying a home”, they were gambling. All of us who took out home equity loans to put in granite countertops to “invest” in our homes helped to create this mess.
As pessimistic and conservative as I tend to be financially, I participated in this mass delusion. I bought a home in 2004 and knew better. I thought my local market was special, unique. It was not. I let emotion and the vision of raising my children in my home cloud my judgement. I long felt that homes were not “investments” but were consumer consumption that marginally kept up with inflation. I stopped listening to that voice and bought on emotion. I poured my money and my time into “fixing up” my house only to find the market and ability to purchase in my home’s price range gone.
As a country, twenty years ago, we had it all... We vanquished the threat of the Soviet Union. We had huge budget surpluses. An economy that had more jobs than people. We had it all and we fucked it up by creating massive government entitlement programs engaging in two wars and cutting taxes at the same time. We believed the perfect conditions of the nineties would go on forever and that we were all entitled to homes that would be featured on “Cribs” and high paying jobs.
I have no antidote or solution to the current economic problems in the United States. All I know is that as a culture we need to expect less, consume less, and want less. Americans work hard, but we need to work smart, focus on results and show leadership instead of having faith in our companies or our political leaders. The aftermath of the last decade is going to take a long time to fix, the only way to start is by changing out expectations...
“This is going to end badly,” I said to no one in particular.
“What’s going to end badly?” Julie asked.
“This,” I said, waving my arm in the general direction of everything outside the car.
“Could you be more specific?”
“All of these new constructions. Homes going for several hundred thousand dollars. All the new homes being built. This is going to end very, very badly.”
“Why would you say that? The housing market is booming here.”
“That’s the problem. There are a limited number of businesses in this area. In Seattle, there’s Microsoft, Boeing, Amazon, and Starbucks that hire people in white collar jobs. The jobs are relatively stable and it has a trickle down effect on the rest of the area. The housing supply is limited geographically and politically. There are lakes and forest preserves that can’t be built on. Getting a permit is difficult as everyone wants an impact study before anything is built. But Phoenix... Phoenix is different. There are huge tracts of desert, all more or less the same as the other tracts of desert in every direction for hundreds of miles. If a developer buys a piece of land that used to be five miles from Scottsdale, it’s pretty easy to get a permit and start building homes on it. No one is going to stop him. With unlimited land in every direction and pretty loose zoning laws, supply is going to outstrip demand. When that happens, it causes prices to go in the other direction. With a limited number of white collar jobs, the top price is going to reach some kind of asymptotic limit and prices won’t be able to go any higher. That’s when the really bad things are going to happen.”
“What happens when prices start going down?”
“People can start walking away. Homes are not liquid. They can take weeks or months to sell. There’s no real way to value a home, so if a home near your home gets foreclosed on, it has a huge impact on the perceived value of your home pushing down prices further. Do you know what a home is worth?”
“I have a feeling you’re going to tell me.”
“Like in any market, a house is worth exactly what someone is willing to pay for it. No more, no less. You could say the same about stocks of publicly traded companies, but it’s not even close to the same. Companies have earnings and the stock trades at some kind of multiple based on those earnings and the prospects of growth for the company. Since no one can accurately predict what the future will hold for a given company, stocks fluctuate quite a bit as buyers and sellers swap their shares. The buyer believes the company will go up in price while the seller believes the company is fully valued or needs the money. I’ve never had a stock trade that took more than a few seconds to complete as my shares are exactly the same as the other shares being traded. I don’t walk around thinking my shares have a granite counter top or a special, unique view and are therefore worth more than the other guy’s shares. I can check to see what shares of my stock are trading for. I can continue to hold them or sell them based on what the market thinks they are worth. I can look at trailing earnings, management, and growth prospects and try to determine how much they ‘should’ theoretically be selling for. Houses are not commodities. A house that is 2,000 square feet in Scottsdale will sell for more than a similar sized house in Tempe, but there is no accurate way to determine what that price difference should be. Homes sell more based on the homes that sold around them plus some kind of emotional attachment to what the home ‘should’ be. Appraisers are about as useful as astrologists.”
“Plenty of people have been making lots of money buying homes and then selling them a few years later for 50% or more than they paid.”
“That’s the problem, it’s not sustainable. People are making a classic extrapolation error. Taking a few points of data and connecting them with a line and assuming that the line is going to extend forever - up and to the right. This is exactly the same thing that happened in the Internet stock bubble just a few years ago. The thought of not getting in on this boom is driving the prices higher and higher until we reach that asymptote. Of course, no one is going to know what that asymptote is, so builders are going to keep building and there is going to be a huge amount of supply out there. Combine that with the foreclosures that are going to start happening, the housing boom is going to turn into a housing bust and it’s going to get very ugly very fast.”
“So you’re right and everyone else is wrong?”
“Yes!” I said it relieved and enthusiastically. Finally, after all these years of being together, my wife understood me. It’s funny, as someone who uses sarcasm quite frequently, I have absolutely no ability to detect it when other people are being sarcastic to me. The moment I finished saying that one simple word, I realized it. Julie was mocking me, challenging my assessment of the housing market in Phoenix and was no longer interested in hearing my blatherings about markets, economics, bubbles, and the coming apocalypse.
The year was 2004 and I was absolutely convinced that the housing market in Phoenix was unsustainable. I was wrong about a few things, but my overall assessment was right. I was convinced the market correction was imminent, but it went on for several more years. I was convinced that the correction would be painful, but I was not nearly pessimistic enough in how the overall economy would be effected. I thought the housing correction would be more local in nature and not effect my home in the Seattle area.
At the time, I knew nothing about derivatives, credit default swaps, mortgage backed bond securities, the games played by the ratings agencies, subprime loans, and other things that added fuel to the economic fire. It is easy and popular to be angry with Goldman Sachs, the government, “predatory” lenders, banks, Wall Street in general, and others. There is plenty of blame to go around to each of these institutions, but in reality, we as a society need to be honest with ourselves and accept our share of the responsibility.
Every person who took a “liar’s loan” for more equity than they could afford shares in the mess. Anyone who took an ARM, interest only, or negative amortization loan was not “buying a home”, they were gambling. All of us who took out home equity loans to put in granite countertops to “invest” in our homes helped to create this mess.
As pessimistic and conservative as I tend to be financially, I participated in this mass delusion. I bought a home in 2004 and knew better. I thought my local market was special, unique. It was not. I let emotion and the vision of raising my children in my home cloud my judgement. I long felt that homes were not “investments” but were consumer consumption that marginally kept up with inflation. I stopped listening to that voice and bought on emotion. I poured my money and my time into “fixing up” my house only to find the market and ability to purchase in my home’s price range gone.
As a country, twenty years ago, we had it all... We vanquished the threat of the Soviet Union. We had huge budget surpluses. An economy that had more jobs than people. We had it all and we fucked it up by creating massive government entitlement programs engaging in two wars and cutting taxes at the same time. We believed the perfect conditions of the nineties would go on forever and that we were all entitled to homes that would be featured on “Cribs” and high paying jobs.
I have no antidote or solution to the current economic problems in the United States. All I know is that as a culture we need to expect less, consume less, and want less. Americans work hard, but we need to work smart, focus on results and show leadership instead of having faith in our companies or our political leaders. The aftermath of the last decade is going to take a long time to fix, the only way to start is by changing out expectations...
No comments:
Post a Comment