Well, here's hoping you're safely through the holidays, and that Santa, in his munificence, deposited more than the richly deserved lumps of coal in your moth eaten stockings. With that cheery greeting, let's start the year with a slap in the yap from the housing market. I know I told you about the light at the end of the tunnel last month but we're not out of the tunnel yet - so keep slogging.
I keep getting asked about the various ‘bail-out' packages being proposed by every sop from Sacramento to DC. So I'll just ask you - do you think WE, meaning you and I who have behaved in a reasonably responsible manner, should bail out the mortgage institutions who lent money to folks who provably could never pay it back? Should you and I foot the bill to bail out the folks who borrowed the money knowing they couldn't pay it back unless prices continued appreciating 25% every year and/or lied on their application to begin with? Why not just take it back from the loan officers who pocketed $500,000 or more foisting specious loans on gullible buyers the past couple years or from the heads of those lending companies who took homes $10's of millions in bonuses?
Is it really desirable to provide easier money and extended terms to people and companies who got in trouble by abusing their access to money in the first place? It's like the government equivalent to the old ‘hair of the dog' hangover cure. So we learn no responsibility - we'll continue to borrow more money than we should, we'll keep building homes in floodplains and hurricane paths because instead of Fannie Mae, the government has implemented ‘Gambler Mae' (courtesy of Bill Fleckenstein's Contrarian Chronicles). Next step? Put your life savings in a hot stock tip, take the mortgage money and buy lotto tickets or go to Vegas and put all your money on black. If it doesn't work out, don't worry about it. The government will bail you out forcing solvent taxpayers to foot the bill for our less responsible siblings and neighbors.
That's not right.
Admittedly I may be less sympathetic that some. I lost a house to foreclosure last time around in the early ‘90's. Mine was from a job loss, not overextension, and I wasn't alone. Unlike the current pandemonium caused largely by greed and fraud, job loss was the big culprit back then. Hell I even put 20% down and still lost it. But nobody came running to my aid, no government bail-out, no hand-wringing liberals, and when the IRS billed me over $30,000 for ‘forgiven debt', I paid it. But I learned something from the experience and that's the lesson being lost on today's casualties.
Dennis Gartman, Publisher of The Gartman Letter, further asks "We wonder who it shall be who will make the decisions as to which mortgagee shall be helped out and which shall be left behind. What shall become of those mortgagees who have paid their mortgage, accepted the newer, higher rates and have been consistent in meeting their obligations. Are contracts no longer to be viewed as law, but rather to be viewed as mere whim. If we allow mortgagees who are in trouble to stand down and have their problems taken up by taxpayers, what then of contracts anywhere?"
Now before we part, I have to take a shot at another culprit in this fiasco, none other than the great and powerful Oz, Alan Greenspan. In a recent speech in Oslo, Greenspan noted that "Markets are becoming aware of the fact that the decline in housing is not stopping... I have no particular regrets. The housing bubble is not so much a reflection of what we did as it is a global phenomenon."
There are so many things wrong with just that brief statement. This is the same Greenspan who appears to have Alzheimer'd the fact that he encouraged the use of adjustable rate loans early in 2004 and endorsed sub-prime loans the following year, the man who dismissed calls for greater regulation of the mortgage industry and argued that housing could not experience a ‘bubble' because all housing was local. This is the same micro-manager who oversteered the behemoth that is our national economy by dropping interest rates 14 consecutive times from 6 ½% in mid-2000 to a low of 1% in 2003. 1%! I remember a lot of us shaking our heads at the time thinking this was not good policy - but he was Greenspan - he obviously was much smarter than any of us mere mortals.
Of course this headlong rush into shallow water lead to the subsequent run-up and further oversteerage of 17 consecutive rate hikes through August of this year. Now we're dropping again and by the time you read this we'll probably be ½ point lower than we are as I wrote this, down around 4%. Makes you wonder - what might have happened if the rate had just been dropped to 3 1/2% or 4% from it's peak in May 2000, and left alone? Would our growth have been slower, more sustainable? Would we have experienced that rocket ride from 2001 to 2006 and would the market be crashing around our ears today? We should ask Greenspan - he's remarkably prescient in hindsight. (Hindsight = the view from where your head is buried).
Oh well, I'm still bullish on real estate and plan on buying more this year. It's still the American Dream and the most reliable builder of wealth for the average family. But we're going through a lot of pain right now that I don't think was necessary and which will probably fester more before it gets better. Just a note of caution - be real careful what you ask the government for, you just might get it. Our private lives are rarely enriched by the intervention of government, our costs are not reduced by more government spending and our freedoms are not expanded through additional government encroachment. Happy New Year.