What they are saying about The Great Housing Bubble

“…The cover is perhaps the clearest representation of what Roberts’
book really is: a clearly-communicated, often satirical, and at some
points very stern, no-nonsense account of why home prices soared,
fomenting the nation’s housing bubble, leaving couples across the
nation struggling to stay afloat on their mortgages.

…In a market already flooded with books on the housing crisis, The
Great Housing Bubble scores points by focusing on explanation and less
on inundating a reader with the sort of heavy-handed quantitative
analysis that only a few economists can love. While some figures are
necessary, the book’s message is never bogged down.

Instead, Roberts presents multiple facets of the real estate market
by taking the reader through the fundamentals and broad concepts of
real estate economics. He then weaves psychology-based theories with
structural factors of the bubble to offer a deeper, more detailed
insight into how and why the housing bubble inflated and burst the way
it did….”

Paul Jackson – CEO, Housing Wire Magazine and HousingWire.com

Preface

I work as a development consultant in the real estate industry in
Southern California. My education and experience has acquainted me with
a variety of real estate markets, but residential real estate is the
one with which I am most familiar. I am not a realtor or a mortgage
broker, and my livelihood, though dependent upon the real estate
industry, it is not dependent upon facilitating a home-sale
transaction. What is presented here is both historical account and
unbiased analysis. My observations of the residential real estate
market are not tainted by any need or desire to convince anyone they
should buy a house. In fact, one of my motivations for writing about
the Great Housing Bubble is to convince people not to buy a
house when prices are inflated and save them from financial ruin. It
saddens me to watch homebuyers get caught up in the bubble mythology
and enter into a financial transaction that will have a strongly
negative impact on their financial lives. People who have already made
that decision cannot be helped except at the expense of a naïve buyer.
Sellers have the marketing machine of the National Association of
Realtors to help them. Buyers have few sources of unbiased information
to assist their decision. Part of the purpose of this writing is to
educate both buyers and sellers on the realities of the residential
real estate market.

One of the difficulties of writing a book on the Great Housing
Bubble in 2008 is that the bubble has not played itself out yet. There
is a necessary change in tense required when speaking of events prior
to 2008 and those projected to occur during and after 2008. Someone
reading this in 5 years may look back on it as history, but for those
of us living it now, it is a history not yet lived. Much of what is
presented here may not come to pass, or it may not happen in the way
hypothesized in this book. History will judge whether this is
prescient, or if it is “a tale told by an idiot, full of sound and
fury, signifying nothing.” [1]

Irvine Housing Blog

I discovered Real Estate Bubble Blogs in November of 2006. [2] Many
were in existence much earlier, but I was not a big reader of blogs
prior to this time. I first discovered the Irvine Housing Blog when my
wife found a series of interesting posts on people who were attempting
to sell properties for a quick profit (flipping,) and they were getting
burned. I was quickly hooked. From the blogroll (links to other blogs)
I was able to locate several other bubble blogs, and I quickly became a
regular reader and commenter on several blogs in this community.

In February of 2007, I was asked to write for the Irvine Housing
Blog. I had a great deal of pent-up energy for writing about the
housing bubble. Over the months that followed I wrote a series of
analysis posts which became the structure of this book. Daniel Gross, a
freelance writer published in Slate Magazine, the Washington Post and
Newsweek, characterized the writing as follows (Gross, The Real Morons of Orange County, 2007):
“IrvineHousingblog, brilliantly drives home the same point with daily
dispatches. The blog is a guide to the seventh circle of real estate
hell–people who buy houses on spec with no money down. A typical entry
chronicles the purchase price, tracks down the amount of debt on the
property, and then calculates how much each party–the buyer, the first
mortgage holder, the second mortgage holder–stands to lose assuming the
seller receives the asking price.”

The Reservoir of Schadenfreude

The readers of the Irvine Housing Blog have a voracious appetite for
profiles of losing properties. They are not alone. Why do people get so
much pleasure from seeing would-be real estate moguls lose a great deal
of money? I can think of no other human endeavor that has engendered so
much pleasure in the misfortune of others by otherwise caring,
compassionate people. In my opinion, the outpouring of schadenfreude we
are seeing as the housing bubble deflates is a mixture of Greek tragedy
and bad karma. In short, bubble participants should have seen it
coming, and they are getting what they deserve.

Schadenfreude is not a spiritually uplifting emotional response.
Most religious traditions would counsel us against it. In Buddhist
teaching, people are taught to cultivate feelings of compassion for the
misfortune of others–feeling empathy and sadness for the slings and
arrows of outrageous fortune when they impact another. [3] The near
enemy of compassion is pity: it masquerades as compassion, but it has
an element of separateness which detracts from the sense of Oneness
with all things. Joy is good: Sympathetic joy, the joy in the happiness
of another, is another pillar of a spiritual existence; however, joy in
the misfortune of another–schadenfreude–is not a skillful behavior
leading to happiness. Even knowing that, many of us feel this joy
anyway. Why is that?

I recognized financing terms were creating artificially high prices
early on. By 2004, I was telling people I knew that this was a problem
which would cause a market crash. Most people looked at me like I was
crazy. “Real estate always goes up,” I was told. “The government would
never allow prices to crash,” I was told. “If you do not buy now you
will be priced out forever,” I was told. This is the intoxicated
language of real estate junkies who have overdosed on the
real-estate-appreciation kool aid. If these statements had been offered
in a defensive manner of someone who is being made to realize they made
a serious mistake, I could have felt sympathy for them; I would have
been able to disarm their defensiveness and helped them see the light.
However, what I generally got was a smug assuredness of someone who
truly believed he was right and I was wrong; not just that I was wrong;
I was a stupid, cowardly fool who did not have the brains or the
bravery to take the free money being given out. This was particularly
surprising given my line of work. It was as if a patient after getting
a diagnosis of cancer told the doctor that the physician did not
understand the tissue growth was a natural, healthy process. The buyers
caught up in the Great Housing Bubble did not recognize the financial
cancer even when an expert in the field told them how dangerous it was.

During the bubble rally, those of us who chose not to participate
were labeled as “bitter renters.” It was suggested we were envious of
the good fortune of homeowners as their property values rose, as they
took on insane amounts of debt, and as they blithely financed a
lifestyle well beyond their means. This was undoubtedly true for some,
but in my opinion, this is not the primary reason so many derive so
much pleasure from the misfortune of those now suffering from declining
property values. These same people who chided us for being envious
actually wanted us to be envious: they wanted us to know they were the
winners in our competitive society; they wanted us to view them as
superior. This act of putting themselves above us created a separation
which prevented us from feeling sympathetic joy for their good fortune,
and it prevented us from feeling compassion for them when they fell.

In our collective unconscious which manifests in our dreams and our
mythology, water is often symbolic of our emotions or our emotional
state. Have you noticed people are often categorized as deep or
shallow? If you are in debt you often feel “underwater.” Anger is much
like water: if not given an outlet, it will fill a reservoir until it
reaches a breaking point and is expressed in a flood of emotional rage.
Each encounter with a pathologic, kool-aid-drinking housing bull
during the bubble rally has added to this reservoir, and reveling in
failed flips is an outlet for this pool of toxic emotional waste.

There is an element of tragedy in every disaster, but financial
bubbles are some of the most interesting because they are completely
man made. They are created by the accumulation of individual decisions
of buyers who are motivated by greed, foolish pride, and a false sense
of security. Each of these people should have known better. Many of
them were warned of their impending doom by those who saw trouble
brewing, and yet, many chose to go down the path to the Dark Side.
Newton’s Third Law states, “For every action, there is an equal and
opposite reaction.” The Law of Karma states, “For every event that
occurs, there will follow another event whose existence was caused by
the first, and this second event will be pleasant or unpleasant
according as its cause was skillful or unskillful.” It became obvious
as the crash began; the behavior of buyers during the bubble rally was
not skillful. Whether it is Newton’s Third Law, Karma, or a Calvinist
form of retributive justice, as this bubble deflates, many of the
participants in this bubble are about to experience a great deal of
hardship. Like many others, I will enjoy their suffering until my
reservoir of schadenfreude is emptied. For the sake of my own personal
spiritual well being, I hope this happens soon so I can regain my
normal emotional balance and rekindle my feelings of compassion for my
fellow human beings.

Introduction

Why did house prices fall? This is the fundamental question to most
Americans, and to those who lent them money. Most homeowners did not
care why residential real estate prices rose; they assumed prices
always rose, and they should simply enjoy their good fortune. It was
not until prices began to fall that people were left searching for
answers. This book examines the causes of the breathtaking rise in
prices and the catastrophic fall that ensued to answer the question on
every homeowner’s mind: “Why did house prices fall?”

Even though the decline is nowhere near over in 2008, already the
Great Housing Bubble witnessed the largest decline in house prices
since the Great Depression. The asset bubble for the Great Depression
was the stock market while the asset bubble for the Great Housing
Bubble was residential real estate. The title of the book, the Great
Housing Bubble, is an allusion to the Great Depression of the 1930s.
Both of these dramatic events were the result of a wild expansion of
credit and a subsequent crash in asset prices that stressed the banking
system and led to a dramatic economic slowdown. [iv]

The book is arranged into 10 chapters. The first 4 chapters provide
background information and are used to define terms and provide a broad
conceptual understanding of residential real estate economics, chapters
5 through 8 discuss the structural and psychological factors that
inflated and deflated the bubble, and the final two chapters describe
methods of coping with the housing bubble. Chapter 1 is a general
description of financial bubbles as a psychological phenomenon and the
unique beliefs of residential real estate bubbles. Chapter 2 details
the financing environment surrounding residential real estate. It
defines and categorizes the types of borrowers and the types of loan
programs available, and it illustrates how financing impacts the wealth
of individual owners and the economy as a whole. Chapter 3 summarizes
the mathematics determining the value of residential real estate and
examines issues pertaining to the rent-versus-own decision, and chapter
4 delves into the fine points of determining the value of individual
lots and raw land. Chapter 5 illuminates the credit bubble (which was
largely responsible for the real estate bubble) with rigorous detail on
the structure of the secondary mortgage market and how the expansion of
credit through this market inflated the housing bubble. Chapter 6 looks
at the housing bubble, its various measurements, and explains why the
bubble burst. Chapter 7 is a review of the psychology of real estate
bubbles. Financial bubbles are primarily psychological phenomenon, and
the various aspects of investor psychology are explored to see how they
shape the market. Chapter 8 is a projection of future house prices
based on the data and conditions as they existed in early 2008. Chapter
9 contains advice for both sellers and buyers who plan to be active
while prices are declining. Chapter 10 is a review of the causes of the
bubble and proposals for reforms to prevent residential real estate
bubbles from happening again.

The examples and data used in the analysis are national in scope,
and they are also focused on the local residential real estate market
in Irvine, California. The Great Housing Bubble is a national
phenomenon; however, the national statistics soften the extremes and
make the rise and fall look less remarkable. In some local markets, the
price changes are truly extraordinary, and it is through examining
these markets that the story of the bubble is best told. A fine
exemplar of the Great Housing Bubble is Irvine, California. Irvine is a
large, master-planned community of over 200,000 residents. The high
incomes of Irvine
residents are reflected in the rental rates for properties which are
consistently near the highest in the nation. High incomes and rents
translate into high real estate prices, even at the bottom of down
cycles. When reviewing the properties in Irvine and the price tags
attached to them, it is not uncommon for outsiders to believe a decimal
point has been misplaced. The lessons learned from the Irvine
experience are universal. Though many the examples from this work focus
on Irvine, this is a book about the Great Housing Bubble of which
Irvine was both a catalyst and one of its biggest participants.

Table 1: Top Subprime Lenders 2006

Rank	Lender	Market Share %
1	Wells Fargo	13.0%
2	HSBC Finance	8.3%
3	New Century	8.1%
4	Countrywide Financial	6.3%
5	CitiMortgage	5.9%
6	WMC Mortgage	5.2%
7	Fremont Investment	5.0%
8	Ameriquest	4.6%
9	Option One	4.5%
10	First Franklin	4.3%
11	Washington Mutual	4.2%
12	Residential Funding	3.4%
13	Aegis Mortgage	2.7%
14	American General	2.4%
15	Accredited Lenders	2.3%
	Top 15 Lenders	80.2%
Source: Inside B&C Lending

The epicenter of the Great Housing Bubble is located in Irvine,
California. One of the primary causes of the bubble was the lowering of
lending standards and the extension of credit to people who could not
handle the responsibility: Subprime borrowers. The word “subprime” has
become indelibly linked to the Great Housing Bubble. It is one of the
causal factors that make the bubble unique, and the collapse of
subprime is widely regarded as the pin-prick which began the bubble’s
deflation. Irvine, California, is the center of the subprime universe.
Three of the top ten subprime lenders, New Century, Ameriquest, and
Option One, are (or were) headquartered in Irvine. Most subprime
lenders have processing offices in Irvine due to the large number of
trained personnel living in the area. Irvine’s New Century Financial,
formerly the second largest subprime operator, is heralded as the
poster child of the bubble. The company name “New Century” implies a
new era and a new paradigm. It embodies the fallacious beliefs and
ideas that inflated the Great Housing Bubble.

Volatility in real estate prices is not new to California. During
the 1970’s, real estate prices detached from typical valuations of
three-times yearly income seen in the rest of the country. Once
residents realized they could push up prices in their real estate
markets to dizzying heights, they have been doing it ever since. Greed
springs eternal. The Great Housing Bubble is the third such bubble in
the last 30 years, and it is the largest of all. The detachment from
traditional measures of valuation was so extreme that it is difficult
for many to comprehend. Each time the bubble bursts, the crash is
incorrectly blamed on some outside force, and each time the rally is
thought to be different than the rally in previous cycles. It never is.

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[1] “Out, out, brief candle! Life’s but a walking shadow, a poor
player that struts and frets his hour upon the stage and then is heard
no more: it is a tale told by an idiot, full of sound and fury,
signifying nothing.” Macbeth Quote (Act V, Scene V). (Shakespeare, 1603)

[2] Partial list of prominent real estate bubble and related blogs:

The Irvine Housing Blog – https://www.irvinehousingblog.com/
Patrick.net – http://patrick.net/housing/crash.html
The Real Estate Bubble Blog – http://www.thehousingbubbleblog.com/index.html
The House Bubble – http://housebubble.com/
Implode-o-meter – http://ml-implode.com/
Bubble Markets Inventory Tracking – http://bubbletracking.blogspot.com/
Housing Doom – http://housingdoom.com/
Southern California Real Estate Bubble Crash – http://www.socalbubble.com/
Calculated Risk – http://calculatedrisk.blogspot.com/
Housing Panic – http://housingpanic.blogspot.com/
Professor Piggington – http://piggington.com/
Dr. Housing Bubble – http://drhousingbubble.blogspot.com/
Bubble Meter – http://bubblemeter.blogspot.com/
The Real Estate Bloggers – http://www.therealestatebloggers.com/
Housing Bubble Casualty – http://www.housingbubblecasualty.com/
Housing Bubble Bust – http://www.housingbubblebust.com/
Real Estate Realist – http://www.realestaterealist.com/
Housing Wire – http://www.housingwire.com/
Sacramento Area Flippers In Trouble – http://flippersintrouble.blogspot.com/
Seattle Bubble – http://seattlebubble.com/blog/
Westside Bubble Blog – http://westside-bubble.blogspot.com/
Marin Real Estate Bubble – http://marinrealestatebubble.blogspot.com/
Sonoma Housing Bubble – http://sonomahousingbubble.blogspot.com/
New Jersey Real Estate Report – http://njrereport.com/
New York City Housing Bubble – http://nychousingbubble.blogspot.com/

[3] Much of the author’s personal study of Buddhism comes from the writings and recordings of the author Jack Kornfield (Kornfield, The Roots of Buddhist Psychology, 1996), (Kornfield, The Inner Art of Meditation, 1993), (Kornfield, A Path with Heart: A Guide Through the Perils and Promises of Spiritual Life, 1993), (Kornfield, After the Ecstasy, the Laundry: How the Heart Grows Wise on the Spiritual Path, 2000). The audio recordings of the Roots of Buddhist Psychology have been particularly influential.

[iv] The stock market experienced a 500% gain in a five year period
before its infamous crash. Much of the reason for the wild increase in
pricing was very low margin requirements. People were allowed to buy 10
times as much stock as they had money due to 10:1 margin trading. This
expansion of credit through the broker’s margin is what drove prices
up, and when prices started to fall, margin calls cascaded through the
market and resulted in a crash.