The questions are :
How did American homes get so expensive? How did we get in this mess? How can we get out of it?
This article is about what houses were like when they were affordable, what made them so expensive, and what they should be like in the future to be affordable again. If you want to cut to the chase, look at the chart at the end. If you want to know more details, keep reading. AB
There was a time in America when, as a nation, there was agreement that money was important, and those who had more of it were expected, even required, to be more responsible with it. That was a golden time for our nation. We built a world class interstate highway system, went to the Moon, created personal computers, constructed communications networks, and fed the hungry all over the world. We did it by being cautious about spending. Those with moderate means did not try to live in palaces, or live like kings. Those with the means of kings still chose to live moderately enough to protect their wealth in the long term. Certainly there was ambition, but it was tempered with concepts like long-term-planning, living-within-your-means, looking-at-the-big-picture, and patient-planning-for-prosperity. The nation was prosperous. That was THEN.
What happened next, nationally, was an attitude shift from patiently cultivating prosperity to I-want-it-all-and-I-want-it-now! From individuals to corporate mega-companies, everyone was in on it.
As an oversimplified point of beginning, the entertainment industry began telling stories using the almost subliminal concept of heightened reality. That’s when several TV characters would live in expensive apartments surrounded by every new style of household amenity and wardrobe appointment with no apparent way to support themselves. It’s not television’s fault. It was just fictional entertainment. But, a viewing public bought into the idea of heightened reality, and began to convert a not-real-at-all lifestyle made for entertainment into a set of mainstream desires which the viewing public believed it couldn’t live without. A viewing public is a buying public, and that buying public had a profound influence on those who make things to buy.
The manufacturers of appliances, fixtures, and decorating amenities dazzled an eager public with amazing products that promised a higher life, …..and delivered it – but at a higher cost.
New and exciting became the by-words in the home planning industry as designers sought to incorporate all those dazzling gadgets, and pursued the development of larger, more complex designs to sell – but for higher fees.
The house and garden television industry seized the obvious opportunity to script shows and create advertising packages according to the wants and whims of viewers desperate to buy the sponsors products.
The Home Builders and Remodelers of the nation saw opportunities to build more housing units than ever, and by offering tantalizing upgrades, which included more square footage along with all those amazing gadgets, were able to “assist” almost every prospect to acquire a real American Dream Home – for a higher sales price.
A new breed of home industry participant emerged – the Flipper. Mesmerized by the combination of TV entertainment and home remodeling, which portrayed the possibility of big profits from small investments, the Flippers bought up everything from run-down shacks to luxurious beach-front condominiums. The process was simplicity itself – buy low, spend a little to fix it up, sell high. But as more Flippers joined the fray it turned into buy high, sell higher. At the peak of the frenzy the process became buy highest……. Oh crap!
The Real Estate Sales Industry, by its very nature, promoted the inflation in value of premium as well as not-so-valuable properties, and succeeding, gained financially by selling heightened reality dream homes to an eager public – but for higher commissions.
The only glitch in the process was the inability of the market place to respond. That is, the people who wanted all those really expensive homes couldn’t afford to buy them. There just wasn’t enough money. The solution was ready and waiting in the banking business. If cash wasn’t available for buyers to borrow, then loans could be written which would help people purchase homes that were real with money that wasn’t. Some banks made loans backed up – not by investors with cash – but by future earnings à la Enron accounting practices, and that meant the money being used to underwrite mortgages didn’t actually exist. But loaning non-existent money wasn’t seen as a problem. The system had to keep churning long enough for real money to catch up with false funds so a special device – the deferred balloon note – was instituted as an incentive to motivate buyers by alleviating the fear of mortgage payments. These mortgages would begin with small payments then, later, balloon into large payments… hopelessly large payments. The most common quote from banker to buyer was “Don’t worry about the balloon note. You’ll refinance or sell long before that kicks in.” Homeowners simply had to keep refinancing and reselling their homes in order to avoid the huge payment increase when the “balloon” inflated. For the economy, as long as un-real money was replaced by real mortgage payments, on time, in the future, there wouldn’t be a problem.
But there was a problem. The availability of lots of cheap money – real or not – just waiting to be used to build an expensive house, which could be sold quickly for a high profit, became the scheme of things. Ultimately, the very ones who inadvertently worked together to create that scheme – the individuals, the gadget makers, the designers, the real estate sellers, the house and garden TV people, builders, remodelers, flippers, and bankers – were drawn into it, captivated by the glistening beauty of a housing market where the homes and condominiums appeared to be made of pure gold. Those who signed the dotted line for artificially cheap mortgages and the promise of easy riches, the ones trying to live too high, too fast, too soon, needed to sell their homes at a profit before the balloon payments started. So, at about the same time almost everyone signed up for cheap mortgages, which meant their balloon notes were all coming due together. To come out financially healthy they all needed to sell to each other for the same high profit.
But too many people were in the same situation. When it was time to sell, there were no buyers, just sellers. So the owners were stuck with impending financial doom as the balloon note’s maturity date neared. When “balloon” day arrived, overnight, mortgage payments increased so much that homeowners were unable to make the new payments and the foreclosures began. The banks who made real loans with fake money failed, and that failure rippled – no, it tsunamied through the entire economy.
When lots of people sell something back and forth to each other at ever increasing prices which are supported by borrowed money….. that’s a bubble.
But when everyone is involved, and has borrowed from everyone else who is involved, and the borrowed money doesn’t even exist, and everybody needs to sell to somebody, but nobody can buy because everybody owes everybody else more money than there really is ….. that’s a bubble about to burst….and as many people know all too well….it did. That’s NOW.
As for the future of the American home, unless the hard lessons of the economic collapse are taken to heart, we, as a nation, will repeat the same mistakes. In fact it’s already started. As 2010 began, I was sure the desires of my clients would be tempered and more conservative, such as simplicity of design, less square footage, fewer specialty gadgets, and moderation in moldings and trim (like crown molding, and door casings). But I-want-it-all is still alive and well. I routinely hear my clients say things like, “This is a custom home. I want ALL the bells & whistles,” and “The mortgage payment doesn’t matter because we’ll sell it before the balloon note matures.” There it is. That’s the stupidity that ruined America.
It’s like we’re standing in the ashes of a burned down house, and we’re going to start rebuilding without clearing the ground. This attitude has to change. But before change can come, we have to realize that change must come. Then we have to be patient and wait for things to get better, because change is never really sudden. Realization is. But, usually, realization only comes after great personal loss. Americans have suffered a great personal loss. We just have to realize why, and not repeat the same mistakes, then we can begin to heal.
Americans must all agree to wise-up in our thinking, slim-down our desires, ramp-up our patience, cut-down our spending, increase our savings, and decrease or eliminate credit card borrowing. Be patient. Be steady. Be sure. Be careful. Be a good American and help someone else calm down and be careful too. Then, when you’re financially healthy again, call me for your house plans.
In the mean time, look at the chart below. It’s this entire article at a glance.
Earlier I said, “the over-simplified point of beginning.” Now we’ll discuss the hidden details of the reason we’re here. In spite of the fact that there are several details, parts, that make up the economic collapse, we only need one word to define the entire era, harvest. You were expecting greed or power or control, weren’t you.
There’s no better analogy than farming, because there is a time of planting, a time of cultivating, and a time of harvest.
- The planting is the alteration of banking regulations to allow possible future earnings to be counted as real profit now, instead of in the future where it belongs.
- The cultivation is the manipulation of financial products into position, so their possible future earnings can be bought, sold and traded.
- The harvest is………………………but we’re getting ahead of ourselves.
Before we continue, you need to know that this blog was intended to be a book about the creation of the economic bubble, those both directly and indirectly responsible, the collapse of the bubble, who is suffering the consequences, and who got away with it. I was going to call it Who’s Cleaning Up After The Party?…………..Nobody!” But, during my research, I discovered that Matt Taibbi had beaten me to the punch with his book, Griftopia : Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America. It’s available as a Kindle edition, and I strongly recommend that you read it. It’s very well written, thoroughly researched, and as to the point as anything I could come up with. So, for at least the next few paragraphs, I’ll cite his work, and give him the credit for a job well done.
The planting occurred when the banking regulations were quietly side-stepped so imaginary money from the future could be counted as if it was real cash in the present. There was a time when banks had to have actual cash on hand to back up their customer’s deposits. This cash had to be either in the bank’s vault, or in the vault of another bank, or invested in the Federal Reserve System, or stored as gold in Fort Knox. It was real money, with real, immediate value, and it could be physically touched and counted by a human being.
the following is in progress
The U.S. Securities and Exchange Commission (SEC) approved an accounting method called MARK-TO-MARKET. Enron became the first non-financial company to use the method to account for its complex long-term contracts. Note that Enron learned this trick from the financial sector.
Mark-to-Market accounting allows that once a long-term contract is signed, income is estimated as the present value of net future cash flows. While using the method, future profit from future projects can be recorded in the present books, although this profit might never be received as actual money, but increasing profits based on imaginary future cash are shown on the present books, as if its’s real.
EXAMPLE : For one contract in July 2000 Enron and Blockbuster Video signed a 20-year agreement to introduce on-demand entertainment to various U.S. cities, by year end. After several pilot projects, Enron recognized estimated [future] profits of more than $110 million from the deal, even though analysts questioned the technical viability and market demand for the service. This was actually a very good idea, but it was too far ahead of technology, so it didn’t work. When the network failed to work, Blockbuster pulled out of the contract. Enron, however, continued to count future profits, even though the deal resulted in a loss. It’s very important for you to remember that in Mark-to-Market accounting, failed future profits still equal counted future profits, and are reported in the present books as real [fraudulent] income.
Mark-to-Market accounting is a trick – in the most foul sense of the word – which will make a medium-size company look huge, so it appears more attractive to investors, by “proving” the company’s present worth by counting profits which are in the future – if then. However, in future years these profits can’t be included when they actually happen, because they’ve already been counted in the past. So, new and additional income has to be cultivated from more future projects which will appear to show additional growth, and then keep that growth expanding…….like a bubble.
By now you may be asking, “What does this have to do with me?” The answer is only a few paragraphs away.
So was Enron the farmer? Not at all. As big as that scam was, Enron was only a two-bit sharecropper compared to the real farmer. To reveal “who” we have to scrape away some dirt.
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