The Market is a Nasty Master and a Disrespectful Servant

 

The USA has long ago decided that a badly constructed market is better than a well constructed government program. Of course every time we run up against the nastier part of market behavior we try government programs one more time.

 

Here we are with the Real Estate Market in this country once again in a sad, sad state of disrepair. Once again we are trying our best to use the power of the government to solve that problem. It is almost certainly true that we will go too far in that process and trigger some nasty unintended consequences.

 

There are a few really obvious things that have gone wrong with the real estate market. One of them is this fact. For the last few years too much money has been available to buyers. Sometimes those buyers were even people who could not afford to own a home. In fact the term “Liars Loan” has risen in importance as the boom years grew long in the tooth.

 

Gnaw on this fact for a moment, there are some two million people who bought a home in the recent past that are expected to default on their mortgage this year. Some people think that number is lower and some think it is higher.

 

You might figure the median price of a home when these loans were granted was a quarter of a million dollars. That leaves you with an astonishingly large number of dollars that are at risk here. Around five hundred billion if my calculator isn’t broken again.

 

A hundred billion in losses have already been written off by some massive financial institutions last year. There is probably a bigger number in store for this year. Some of these loan failures are due to the loan brokerage industry’s incentive to fool itself about the loan buyer’s ability to pay back their loan.

 

Some further number of loans will fall because the price of Real Estate will drop during this year. People have a small incentive to repay a loan when their home is worth less than the total principal cost of that loan. If you cannot sell your home for as much as you owe on it say, “Sayonara,” and book a flight out of town. There will be no consequences.

 

So here is a second statement about markets. A market with no consequences for bad behavior is broken. In that market both the buyer and the seller will have cheated one another and neither cares because they are both playing the game with other people’s money.

 

There are tens of trillions of dollars in the Real Estate Market here in the USA. One would think that we might take care to keep such an important market in good repair. One would apparently be an idiot to believe that.

 

So what is to be done? Well a small group of entrepreneurs is plotting to take over the Real Estate Market here in the USA. How do I know that? It might be due to my mystical powers, Grasshopper, but it isn’t. It is due to the fact that one of the things that always happens when a market is in disrepair is that someone sees an opportunity.

 

I know that because I am one of those people. They are called Entrepreneurs in case you are uninformed about their preferred name. They will be called a lot of other names before this is all over. This will be an interesting ride for those of us with the stomach to pump out the sewage that has filled this boat’s bilges.

 

Of course if no one volunteers to do that nasty job this ship will sink in an ocean of bad solutions and bad debt. That is not a consequence to be contemplated. Thus it always is with markets: bad behavior appears, things look rosier and rosier, and then the fit hits the shan.

 

I try not to curse in these blogs. Some poor child might stumble into this verbal vomit and emulate me. That too is a fate too awful to be contemplated. In fact it might be worse than the mess we have all created in the Real Estate Market. In markets as in life, outcomes cannot be known until they have occurred.