Same as it ever was…

We’ve been here before, and here we go again.

The question I get asked the most is “Are we in a housing bubble?”  Quite simply, the answer is “No.” Just because homes are selling for more than they have before doesn’t mean we’re in a bubble.  A bubble is a fundamental flaw in the market. I like to say it’s like an aneurysm. An aneurysm is a bulge or “ballooning” in an artery.  It is an anomaly and if it continues to expand, it will burst. When a market has a fundamental flaw and is bulging or ballooning, it will burst.  But before that happens, there has to be a fundamental flaw. In 2006, the flaw was terrible lending practices. Borrowers didn’t even have to fog a mirror to get a loan.  A great book about that period of time is Kirsten Grind’s The Lost Bank. It’s about the failure of Wamu, formerly known as Washington Mutual. The lending practices of Wamu, the second largest bank in the country were sketchy at best and fraudulent in many instances.  It wasn’t much better at the largest bank in the country or any of the other ones for that matter. Bad lending practices caused a bubble.

Stated loans, also known as Liar loans became the standard.  Selling everyone an Alt A product (less than stellar credit, larger payment to the loan officer) became the norm, even when the client was A paper (top credit scores, most likely to repay).  They were not governed by the SEC who has my favorite Rule 405. Rule 405 essentially says to put your client in the investment vehicle that is right for their goals and risk tolerance, every time.  Ergo, a retiree should never be in a teaser rate loan, always 30 year fixed rate as they may not have the ability to withstand a shot up in the interest rates. World Savings sold a Pick-A-Pay loan that ended up on 60 Minutes for all of it’s problems.  Borrower could pick their payment. They weren’t educated on why they shouldn’t choose the lowest payment, so many negatively amortized their home having no idea what that meant.

Finally, Realtors had a lot of culpability in what happened in the housing bubble.  Never trust anyone who says a market will always go up. The real estate market, just like the stock market goes up and down.   It expands and contracts. It is cyclical. It doesn’t “always” do anything. The difference is that real estate exists, it is a finite asset.  It does not disappear in bankruptcy or failure. Even if the value is greatly reduced, there is value. That is why, over time real estate is still the most reliable asset.  For instance, if for some reason the market blew apart today and everyone lost 20% of their value and someone had to sell right now, whatever their next real estate move may be, it would cost them less because the market has contracted.