Real Estate - Meltdown (Part 2 of 3)

PART 2 of 3

I became rather fascinated by just how screwed one could become by buying a house in 2007 and I started to really research things. The more I learned the more I realized that California was in for a huge nasty shock when reality caught up with real estate. I realized that these houses that were worth a million dollars were not actually worth a million dollars unless there was an endless supply of suckers. While this is not far from true, the supply is finite and I realized that this was like any other classic Ponzi scheme.

I have been explaining it to people in terms of a Ponzi scheme for a year. Now, it's funny to hear that mentioned in the news by "credible" people. The basic problem with any pyramid scheme is that once you start dealing in the *idea of getting rich* as the commodity, it is easy to lose sight of what's really going on. Through this mess I have learned that I can indeed get rich in real estate. The only thing that's required is patience and an endless supply of people who will stupidly ignore the fundamentals.

(To instantly understand what "the fundamentals" entail, see these simple graphs .)

The rules for guaranteed success are shockingly simple, and I would have thought difficult to ignore, but ignored they were. Basically a house has a utility. This is the aspect of a house that is like a hotel room, you need a place to stay? Here it is. If you go to a normal motel and they want $1000/night, you aren't going to say, it's ok, I'll book two nights and find a sucker to sell the second night to for $2100. This is how the California housing market worked for the last 8 years.

Since so many people got caught up in this game, there are a lot of people who aren't going to get the cake now that the music has stopped. All indications that I've seen indicate that the unimaginable number of houses empty and owned by banks is going to continue to increase. A lot. What compounds the problem is that houses, thanks to the bubble, represent a lot of money. For this huge segment of the economy to suddenly go very flat is very unsettling. Basically people were taking out home equity loans or taking profits from earlier in the Ponzi scheme and fueling the economy very nicely. That will be coming to an abrupt halt, oh, about right now.

This is, in my opinion, so huge and so many people are so screwed that if the USA avoids another "great" depression, I'll be amazed. People are losing their homes and they are saddled with incredible debt levels. The credit party is finally over as lenders are so over extended, they're not really in a position to postpone financial Armageddon with yet more bad loans.

What I worry about is even more insidious. The banks loaned huge, huge money because that's what they thought made them money. And it did. Huge money. For a while. But now they find themselves hugely over-invested in deadbeats and real estate that isn't worth anything. You can try to imagine some accounting trick that can bail them out, but fundamentally, when they loaned $2 million so someone could buy a house that should have been $1 million, someone got that real money. The banks (whom we presume to be left holding the bag as the borrowers bailed out) just lost a million real dollars. And this scene is repeating itself with disturbing regularity.

My concern is that when I go to withdraw my hard fought savings, the bank will just say, whoops! Sorry! Because if everyone who has an oppressive mortgage is bailing on the banks, do you think it's far-fetched to imagine the banks bailing on their investors, the depositors? Of course that depends on if the bankers are more scrupulous than the borrowers. Oh shit!

One idea to help with this problem is to invest liquid capital in foreign markets and currencies. Here's the problem with that scenario: the rest of the world had the same kind of ridiculous housing Ponzi scheme too. If you think the Pound and Euro are going to do great after the shit hits the fan in Britain where real estate stupidity was similar to that in the USA, I think you'll be in for a shock.

"London calling to the underworld
Come out of the cupboard, all you boys and girls
London calling, now dont look at us
All that phoney beatlemania has bitten the dust."

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