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Wednesday

Real Estate Was Not a Ponzi scheme

Cash is Cash really.....unless you hold all your wealth in gold bars in your basement then I guess you could say it was all phony.....what about the 401 k accounts and IRA accounts and mutual fund accounts?...that are now vapor....I guess you could say it was all phony and then say it will be all phony again in the future.....but then again we could go back to trading cold coins and pieces of sliver....the real estate market seemed to go up reasonably until a few years ago....there were many places that saw no appreciation for 10 or 12 years prior to 1997 or 1998 and even as late as 2001 property values were not really rising dramatically. It wasn’t until 2004 that we started to see the massive appreciation in real estate. There was no 25 year ponzi scheme as far as I could tell. The circumstances that led the fed to believe that they needed to stimulate the economy with low rates naturally added about 10 % to home prices just based on lower payments. It was a reasonable up tick to ensure that we would come out of a recession. The home ownership initiative that congress indorsed was another piece of the pie and began to put more stress on the system as the notoriously steady homeownership rates began to climb to all time highs. When congress decided that home ownership for over 70% of the population was to be good for the country, they took the economy to the edge. The tried and true theory that in general real estate would always appreciate or at very least never depreciate more that 5 or 10 % was soon to be put to the test.

2004 was the giant leap of prices in most cities. It was when a few areas saw well over 30% appreciation for one year. Las Vegas had a ridiculous number of 34% increase in housing values for the previous 12 moth period. I knew that between the fed, the real estate community, home builders and the local politicians they would soon have major issues. Even if they weren’t driving up real estate prices to unheard of levels, they were issuing far too many permits and becoming far to permissive on previous laws regarding the number of homes per acre. The streets were not large enough to accommodate the massive growth and as homes were being build virtually on top of each other. So even with out the recent credit meltdown Las Vegas was sacrificing quality of life for growth and tax dollar revenue. It was only a matter of time before prices would come back. The appraisals had gotten ridiculously high and unjustifiable, but the continued. I don’t care what anyone says but there was a conspiracy between home builders, appraisers, and mortgage brokers that systematically drove up the prices of new homes by thousands of dollars by selling homes in phases. These phases were just a scam and marketing ploy to ramp up demand and increase revenue. But think about the process for a minute. Phase one in April goes on sale for 200000 for example. By June phase 2 would follow. But the price might be 220000 or 240000. These home were exactly the same as the first batch that sold during phase one. How could it be possible to get a 240, 000 appraisal on the phase 2 a few months later? The answer: is that you can’t get a valid appraisal if all of the homes in phase one sold at the basically the same price.

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