Collective Denial

Warning: Chances are you're in big trouble, or in denial.
(from CBS Marketwatch)

"And folks, this is not just an isolated West Coast phenomenon."

"Yes, the irrational exuberance of our failed stock market simply shifted over into a new irrational exuberance in housing. In five short years an estimated $30 trillion was added to housing prices worldwide, an unsustainable 75% increase to $70 trillion, largely due to then Fed chairman Alan Greenspan's cheap money policies."

"Greenspan dismissed the global bubble, telling Congress it was just a little "regional froth." (see definition of froth in earlier post) Happy-talk, while our housing and mortgage industry has been taking advantage of naïve home buyers and sellers with loose underwriting practices: Low-interest home equity loans, and interest-only, low-equity loans feeding housing price inflation."

"Still, experts like Gross, Shilling, Talbott and others are dismissed as "crying wolf" one too many times. We're overwhelmed, confused, numb, feel helpless, so we fade into denial. And our leaders are even more oblivious, hardened and ineffectual."

"Unfortunately, bubble warnings are routinely dismissed. Our brains can't handle all the bad news. Besides we've been brainwashed into short-term thinkers, incapable of long-term planning. Witness the collective denial and paralysis toward mounting deficits from out-of-control federal budgets, foreign trade, war debt, state, municipal and consumer debt, under-funded pensions, Social Security and Medicare shortfalls."

"Back during the '70s recession I was a real estate expert with Morgan Stanley. We helped banks and REITs work out billions of loser portfolios, reorganize, file bankruptcy, even advised the U.S. Dept of Housing & Urban Development on the collapsed Federal New Towns program. I've worked for developers and mortgage bankers, got degrees in architecture and city planning, taught commercial real estate at Cornell University."

"But oddly, like the rest of America, most of the time I don't think about the housing bubble that's about to pop. We ignore the coming storm."

But "so what?" you say. You've heard it before. Right? Warnings reported month after month. For example, Talbott reminded me of an editorial in The Economist last summer:

"Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock market bubble burst in 2000 ... This is the biggest bubble in history."

"For example, assume you live in one of America's top 40 metro areas. You bought last year for $500,000 with $450,000 in mortgages. If the market drops just 10%, your equity's gone.
And if it drops the predicted 47.2%, your home's worth $250,000, you really are in trouble. If you lose a job, or suddenly get hit with extraordinary expenses, or just can't make tax and mortgage payments, or otherwise forced to sell, you could be wiped out under the tough new bankruptcy laws."

"I just learned we live in a metro area that could see a devastating 55.8% decline in home prices in the next five years. Worse yet, most of the real estate north and south of us -- from San Francisco to San Diego -- is predicted to decline 50% in the next five years. Ouch!"

'Am I going follow Talbott's advice and "sell now?"'

"No. We love our home and our town. Besides, even if prices do fall 55.8%, we're still ahead of the game, out of harm's way. But maybe you should sell now. A lot of people are going to get badly hurt in the real estate crash, far worst than in the 2000-2002 recession when we lost $8 trillion in market cap."

"Sadly, unlike the stock market there's little you can do once the illiquid housing market collapses. If you can't sell now, you'll have no choice but bite the bullet."

"So please read Talbott's book closely: Is your home is at risk? Then quickly decide whether you can hang on in a housing collapse, a stock market bear and another long recession. And if not, consider taking his advice to sell now"