You call that a Bubble?

Many people have been talking about the recent Real Estate bubble.  I am seriously disappointed in the whole country and feel let down.  As an anthropologist who works for a hedge fund I see some missed opportunity. In this era of new banking technology, progressive legislation and the internet we had a bubble that by some estimates may destroy $2 trillion in value.

 

Folks, it was like you weren’t even trying out there, this is the U. S. of A! Where is the spirit, the pull yourselves up by your boot straps, put some wood behind it, get after it like nobody’s business spirit?  This bubble was built on granite counter tops across the country.  A rock solid foundation like that is a great bubble platform.

When Japan had a real estate bubble in the 80’s they could claim that the land under the Imperial palace in Tokyo was worth more than all of California. Now that’s a bubble.  Its disappointing that with all we had going for us we just couldn’t push the envelope a bit more on this one.  Where is the U.S. that used to really show the world how its done.  Where is the super sized, high speed, high octane, rocket fueled monster bubble with extra cup holders and bling rims?  It’s almost embarrassing to throw the B word out there to describe what we produced, more like some wind with a lump in it.

Current estimates by Dr. Roubini are for 1,000 bank failures, the FDIC is pumping up the Dallas office in anticipation and pulling greybeards out of retirement.  I hate to burst your bubble about the bubble but today’s bubble just isn't that great yet.  In the 80’s S&L crisis we blew through 1,000 banks without even breaking a sweat.  In the great depression an estimated 4,000 banks in a country with maybe 1/3 the population went under. Now that was a bubble.

Like any good sports obsessed culture, we should look to the replays and see who let us down here.  I mean maybe we can look at the players and figure out why this thing didn’t really get cookin’.  This bubble stuff is complicated, so lets break it down and give everybody a grade.  Be warned this isn’t lake Wobegan, mostly there was below average performance.

First up our institutions, the big guns, they generally did ok, but obviously left some bubble value growth opportunity on the table.

 

B+ for the banks, a lot of banks really got out there and become category killers, with leadership from Tangelo Mozillo at countrywide and products like NINJA (no income, no job applications) mortgages there was real mojo being shown by these guys.  Now we had quite a few banks at the party, but Countrywide really outshone the field, WaMu gets an honorable mention. 

 

That being said lets face it, our banks never quite got to where the Japanese did, they just didn’t have the hunger for value creation.  The Japanese banks had 2^nd and 3^rd generation mortgages in the 80’s.  Now that’s long term thinking brilliance.  A little something for the grand kids.  The Japanese schooled us on this one. If our guys would have been trying a little harder they could have showed a bit of pioneering spirit and come up with the 4^th generation mortgage or maybe given our political sensitivities and IVF technology “a right to life mortgage” where every sperm or egg is entitled to hold a mortgage.  Who knows? All I am saying is we got out innovated on this one and left serious real estate development and buying opportunities on the table.

C- Fannie Mae & Freddie Mac really only took the smaller mortgages and left the heavy lifting to the private sector.  Fannie and Freddie still managed to get 9 out of 10 secondary mortgages.  These guys had the whole US government flying cover for them, the world was their oyster.  Fannie and Freddie did show great efforts on the weasel lobbying front so we can give them some credit.  They do have a combined $5.3 trillion in mortgages, so an OK effort, if the darn regulatory environment wasn’t so gridlocked, I bet they could have hit $10 trillion.

B+ Ratings Agencies.  Moody’s, S&P and to a lesser degree Fitch did pretty well, I mean these guys have a government monopoly as NRSROs from the SEC on what is and is not qualified as investment grade.  You guys have a government monopoly on truth as it relates to value, how cool is that? Without rating CDOs as AAA a lot of banks wouldn’t have been able to share the love with the rest of the world.  AAA mortgage debt was one of the great US export products of the last few years. 

 Banks needed the ratings agencies blessing and they got it.  It worked well. The banks paid the ratings agencies for the rubber stamp, the ratings agencies stamped and presto instant money for the whole world’s pension funds and central banks.  It worked like a charm. 

 

Moody’s and S&P pulled through, but left a lot on the table.  The ratings agencies have admitted that their models may have been broken.  What!?!, You guys were running this stuff through a model?  That is crazy, it just slows up the whole process.  You were paid to be a “AAA” rubber stamp and here you go and delay the game and muck up the works using a broken model.  We could have gotten a heck of a lot more mortgage backed paper out the door and offshore, if you guys hadn’t been busy mathturbating with the models.  Next time keep it simple, take the money, rubber stamp the paper, keep your mouth shut and move on.  It will be like the good old days with municipal bonds.

 

A- The Fed and OCC under Greenspan.  With 1% money, a ballooning asset category and a helpful look the other way approach to bank oversight, these guys pulled through.  Bubble building is a team sport but these guys quarterbacked us through it.

 

B+ Legislators who passed the laws allowing 1031 exchanges thus making any diversification out of real estate assets appear ridiculous in the short term due to the immediate capital gains requirements.  Next time, how about an incentive, such as no taxes on real estate gains ever.  Money put into stocks and bonds is really kind of a waste when there are homes to built and available land such as the grand Canyon.

 

Now we can’t leave out the little people, because with out everybody pulling there weight a bubble can’t going.  It takes a lot of gumption and “look at what the neighbors just bought” envy to get bubbles humming at fever pitch.  So in the era of identity politics, I would like to point out the efforts of various groups and some tips on how they can improve the size and value created by the bubble next time.

 

B- Minorities, meaning everybody, because we’re all minorities if we self identify enough.  So Africanindiancaucasionhandicappedveteranasianwhitepickanyolegroupyoubelongto there was probably a program at the federal or state level to get you into a home.  I don’t have the details, but I know there a few of you who don’t have homes.  By definition everyone is fairly unique and so there was probably or should have been a government backed home ownership program for everyone.  Politicians did a great job of helping out here with money and incentives, but some of you dropped the ball.  Never let paper or a sense of accountability or responsibility get in the way of free money.

F Prisoners. Boy was this a lost opportunity or what?  With 2.3 million prisoners in the U.S. this was a major oversight. I bet only a handful managed to get mortgage approvals with all the crazy red tape we had.  It is un-American.  The US has the highest prison population per capita on the planet.  This is a huge resource which we didn’t tap, and people complain about offshore drilling being a missed opportunity.  How are we supposed to maximize the potential of our real estate if every one isn’t fully in on this and creating “value”.  Every prisoner should have had a home or at least a condo in Vegas or Miami waiting for them upon release.  Didn’t the ACLU look in on this?

B Mortgage brokers, you guys did a great job of helping the bubble.  You really were the ambulance chasers of the era, if it hadn’t been for you setting new ethical standards, used car salesmen would still be holding down the ethics benchmark.  Mortgage brokers get a B because anyone could walk around in this country and see that there were many homeless shelters and places located under bridges where mortgage brokers didn’t chase leads.  Come on, the lack of a FICO score or fixed address is the perfect sales lead in need.  Next time show a little hustle and compassion out there.

 

D+ The elderly, it is pretty obvious to a lot of people that many elderly live in retirement homes.  What kind of communist 60’s, group think, drugged out approach to life is that?  These people should have been all signed up for 30-40 year mortgages instead of sitting around popping meds and watching Jeopardy all day.  Approaching death’s door is no justification for shirking responsibility to help build the real estate bubble of tomorrow.  Think of the children and grand children for gosh sake.

 

C+ Gays and lesbians, what is it with all the cohabitation?  That living together stuff means fewer homes being built.  Stay single, get out of the closet and each own a home for the sake of the bubble.  And hey what about “Subprime” the musical, a few show tunes probably could have glamorized the “I own 5 condos lifestyle a bit”.

 

C- Family Values Crowd, see above about cohabitation.  The average household has 2.3 people in it.  Sounds like a lost development opportunity.  This image of Norman Rockwell moments and Waltons style family compounds is just so Kennedy and unhelpful to maximizing home ownership.  One person one home, that’s the only way we are going to really build something of value out there.

 

B+ McMansion owners. You, yes you living on Road Apple Gulch or in Breaking Wind Meadows, yes you in the vinyl gothic revival palace, a style evolved from the mating of a double wide trailer park home with a Greek mammoth.  Good effort, but many of you only had 3 car garages and no pool.  Yes, your home overlooked the golf course, but visiting friends still had to actually park their cars outside when visiting and couldn’t go for a swim.  Stop being so selfish next time. Those vinyl Corinthian columns don’t cost that much and the cost is more than made up for in the increased home equity value.  More vinyl equals more value so spruce it up a little.  Good job on the Sub-Zero fridge.  Rumor has it there were even gated communities without gates, that’s no way to build a bubble.  Exclusiveness builds the perception of value and we needed that perception more than ever.  You can’t cultivate envy without exclusion.

 

D- Silicon Valley. Google, yes Google.  That “do no evil” bit really doesn’t wash as an excuse, where was the Google map with spinning dollar signs on every corner, the “I feel lucky about a new house button” on the home page.  Amazon dropped the ball here as well. Where was the American spirit of innovation?  I never saw the one-click button for home buying. Total waste of an abusive patent, E-Bay the same.  Honorable mention to the guy who bought a house by trading single red paper clip.  That’s the spirit, no money down of course he is in Canada and now wants to trade out of the house.  We got out traded by a Canuk…argh.

F Hip Hop nation.  Fellas where were you on this one.  You all got schooled by that Pat Boone lookin no money down late night TV brother Carleton Sheets.   P diddy where was the Sean Jean Mortgage line?  You know,”Get you a piece a da hood with YO! Money down.”  Where was the music, the vibe?  You guys are so busy packing anger, gun culture, misogyny (look it up) and violence onto CD’s you forgot to look at the real estate edge.  Most hip hop consumers are young adults from the suburbs, a perfect future home owning demographic.  Where were the lyrics….got my ALT-A locked and loaded, points set high so I can catch me some sweet REFI…or um something like that?  If you can give us 50cent why not “MC Prime packing a 2 and 28”?  You totally let us down, you guys could really have pumped the bubble in the hood and brought down some coin.  How about the NWA mortgage servicing company, now that would have been keepin it real gangsta style.

 

A+ Presidential candidates, John McCain, well done 7-8 homes, that's the spirit, but you could have used a little more leverage, probably left 10-15 homes on the table.  Barrack Obama, that move with Tony Rezko on the financing assistance was brilliant. When he gets out of prison, I think we know who gets to head HUD.  Both shining examples for the citizenry showing what house ownership and building value is all about.

 

F Children, the little ones really didn’t pull their weight at all during the bubble and I blame the parents.  One has to make hay while the sun shines and many parents had their kids in school for 9 months out of the year. Wow, talk about double negative.  If the little tykes are in school, it raises property taxes and wastes their time. 

 

Next time try home schooling. There were many mortgage applications across the country just sitting around in desks that went unused.  This is a waste and unfriendly to the environment, where do you think those will end up now?  That’s right in a landfill, how unGorish.  What better way to learn the ABC’s than filling in credit application forms. Those little hands could easily have been filling in applications and learning that $40k+$40k= $150k combined income, just like mommy and daddy said.

 

Ok so what can we do next time to really show the world what we are made of?

 

A lot of the tips and stories above provide a few pointers. If we could all just give a little more to build the bubble next time. A lot of money was left on the table. Many people in the emerging and developed world never even got the chance to own our real estate backed debt. It was obviously in short supply due to pension funds and central bank hoarding. The huge untapped developing markets for our debt were untouched. Bono is probably pissed about that one. 

 

This is the country that invented giving 110% on the job.  We need to innovate and really pull together as a team next time.  We can’t let ourselves and the world down.  We will know our super sized monster truck with gun rack bubble has arrived when Fox News proudly declares “Trailer park in Tulsa worth more than all of Japan.”  We can do this people.  Maybe the $45 trillion in CDS counterparty issues...

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