November 14, 2008

You Can't Build A Luxury Economy On Credit

I don’t know much about economics, and the only thing I remember from taking that class is supply and demand, I don’t remember the theory exactly but I think even I saw this economic crisis coming.

I was working for a major corporation as a sales consultant but wanted a little flexibility and the opportunity to make more money. I loved houses so I thought about real estate, Real Estate I thought would be a great way to be my own boss putting my skills and outgoing personality to use.

I went and got my sales person license and hooked up with a broker giving it a go part time. It didn’t take too long before I realized something. I lived in a middle to lower income community yet a single family home was going for over three hundred thousand. The same houses that were just over a hundred and fifty thousand only a few years before had almost doubled in price, while income in the neighborhood did not see the same increase. Guess what, people were getting loans and buying these houses.

There was the so called speculator "investor" who bought property only to resell in a couple of months; the developer who was buying every green space, every vacant lot, every house with a lot and building three or four houses; homeowners who saw the madness and decided to get in while the going was good were refinancing or putting their house up for sale; and the early victims of the sub-prime loans, people who bought homes they couldn't afford and were trying to get out from under the burden.

Inventory was going up and up, so the one hundred percent finance loans, and no income check loans, or the three percent down with the seller provided closing cost loans were heavily marketed. Real Estate offices were popping up like churches. Mortgage brokers were pressuring brokers to use their products, steering them away from tradition and stricter lending sources like banks. Sellers were pressuring buyers to use their mortgage brokers. Everyone showed up for their piece of the pie. The hair stylist barely making forty thousand, the couple making about ninety buying a house for half million down the street from a housing project, the developer building boxes on every available space, the rental buildings becoming co-ops to capitalize from the ownership society mentality.

Sometimes legitimate stable buyers were rejected because there was nothing for the broker to gain from having such a buyer. They needed buyers who fit the profile the mortgage broker was pushing. The mortgage broker’s hot product was these sub-prime loans. When my broker would ask why I wasn’t making as much sales, I talked about the disparity between income level and property value. Rental prices were also affected by this housing boom. Rental rates were skyrocketing, owners trying to raise money to help pay their mortgages. There wasn't affordable housing being created. The same property was being sold over and over, and houses were staying longer on the market. You could feel the panic and corruption but everyone had on their smiley face. I was encouraged to make deals because something could be worked out. I tried to sell only the really crappy houses and laid off the new builds, it was hard to convince families to buy the old rehab. I kept running into more and more seller who was foreclosing. I eventually left the business and just went back to my corporate job.

But it wasn’t just the housing situation, it was that in every driveway and on every street there was a predominance of SUV, Mercedes, Denali’s, BMW's, rovers, hummers, JAGUARS, very high end and gas guzzling cars. People who had no use for a truck were driving one, despite all the reporting of children getting run over by SUV because parent couldn't see behind the darn thing, didn't matter, they became the family car. Here too was the zero money down, no interest loans highly marketed. Everyone had a car, mom, dad, teenagers all fueling the petrol demand and impacting gas prices.

It wasn’t just the gigantic gas consuming, air polluting cars that flooded the streets it was the brand names seen everywhere. People wore their brand, from true religion-torn up jeans for two hundred dollars, to Sean john-sweat pants made in a sweat shop for three hundred dollars, coach--plastic bags for five hundred dollars. Mega stores were on the rise. Everything was steadily increasing; concert, sports, and theatre tickets, telephone and cable, food--the one thing not increasing, INCOME. Most of these things were paid for with credit. It all had to come to an end eventually. How could the average person in a middle to lower income neighborhood afford all these luxuries I wondered? Turns out they couldn't.

Update#1: I was watching one of the news programs the other day and they were showing one of the auto makers and they were still building these huge trucks and Suv's. They still don't get it. They should halt all production on these massive cars, building only smaller cars, until they can retool. We can just recycle the SUV already in circulation. I would think there is a limited market for these kinds of vehicles, but they are dominating the roadways and we have to change that. And I don't just mean to talk about the lower to middle income neighborhoods.

People are buying studios for half million dollars in Manhattan. A great deal of these Manhattan communities are held up by people who depended on their bonuses from organizations like Goldman Sachs, Lehman Brothers, AIG, or Merrill Lynch. You now have online trading companies allowing people with very little understanding of the market able to participate. Could this be the reason the market is so volatile, shooting up and then crashing the next day. We now have a wall street full of speculators like in the housing market? I don't know much about economics, I just remember supply and demand and I kinda talk my way through it.

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