Behind the housing bubble: 'greed on steroids'

Recommended reading: The "dust-up" in the L.A. Times Opinion section pitting consumer advocate Paul Leonard against economist Christopher Thornberg. 

Leonard argues that Congress should rework bankruptcy laws so that homeowners, who were sucked into an unregulated world of reckless lending, can renegotiate their mortgages in bankruptcy proceedings.

In response, Thornberg argues that borrowers have only themselves to blame, and should not receive special breaks. You've heard that argument before -- sputtered angrily on the comment section of housing blogs like this one -- but rarely from an accomplished economist. I recommend you read the whole thing, but here are excerpts:

Thornberg writes: "At their root, all bubbles are driven by individual greed -- the desire to make money."

"Think of it this way: Every buyer over the last few years had a choice: Buy a home or rent an apartment until income was more in line with prices. Many leaped into the housing market even as prices climbed to such high levels because they thought they could sell at a higher price. To a degree, they were all speculators. ... This isn't a sub-prime problem; it's the same old greed problem on sub-prime steroids."

"No one likes to think of a family thrown out of a house. But many people made a very unwise decision in recent years: They bought a house they couldn't possibly afford. ... Now that the house of cards is falling, all parties are taking a hit. But it all started with buyers who bought something they couldn't afford and listened to the words they wanted to hear to help themselves justify that bad decision. You can't have a lender without a borrower. To single out that one party as the hapless victim is to distort the true situation. Everyone had a choice -- and still has one. If you can't afford to buy, you rent."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: A foreclosed house in Lake Elsinore, courtsey of Richard Novak.

Comments

[sfvrealestate]

Okay, so all of those former homeowners are going to become renters now. According to Leonard, that may be up to 600,000 families. So, that's a lot of new people chasing after the same number of rental properties. Aren't all those sheep for the shearing going to lead to rising rents? And therefore, perhaps, a speculative bubble in rental income properties? And then who benefits, aside from landlords? Just asking.

[LA-renter]

If pigs had wings...

In what microeconomics textbook does Dr. Thornberg live?

Greedy borrowers?! My acqaintances bought houses for shelter. Two colleagues moved to LA in 2006 and bought houses right away because (1) renting was inconceivable to them, and (2) the bubble-mentality told them that it was now or never.

The housing market was made speculative by the real estate and mortgage industries.

I prefer: It takes lenders to have borrowers.

Almost all the greed and gain --I estimate 95 percent-- was the lenders and mortgage dealers. Yeah, real estate agents got a cut too. But the bad guys here are the lenders.

No excessive loans, no excess purchasing.

Real loan standards, no ridiculous bubble.

Whatever the medicine, it must not relieve any pain for the lenders.

[Laker]

Christopher Thornberg is a true honest man. This guy has no agenda and to be honest, i'm shocked that smart, educated and experienced people like him get a chance to tell the truth about the current situation.
I solute you Mr. Thornberg.
Can we vote you for president, or at least to replace Paulson or Helicopter Ben?

He said it, and everybody here knows the problem. It's the high prices fool (Yun)...When prices get back to levels backed by incomes, market will get reborn and the economy will boom once again. Deadbeats will rent, and true hard working people will own homes, that is not a dream, that will be reality sooner or later.

[Bill]

Hey i just got into a pyramid scheme too! Can a bankruptcy judge get me my money back to?

[ajax3456]

This is not a joke, 2 homes for the price of one.

http://www.youtube.com/watch?v=VgTdxEGauok

[kat]

I suppose it's not all that exciting when the "mortgage crisis" turns out to be just pure blooded greed.

What, no victims? No vast financial conspiracy to take advantage of those poor people whose sole dream in life is to own a two bedroom 600 thousand dollar home in the hopes of selling it two years later to the next schmuck for 800 thousand?

Peter, the people are not going to like hearing the truth. Trust me. They feel a lot better when they can blame other people, or blame forces outside their control, or blame the fact they rely on a mathmatical system that doesn't exist outside California.

They are not going to like this guy's theory very much.

[Wayne]

>Many leaped into the housing market
>even as prices climbed to such high
>levels because they thought they could
>sell at a higher price.

I think this is only true for some people. I think others got into the market because they thought, if they didn't buy at that moment, they might never be able to afford to buy in the future as prices would climb completely out of reach.

I think some of this bubble was inflated by greed, but some of it was inflated by desperation, too. And some greedy people also preyed on the desperate, further inflating the bubble. Many of the desperate got in over their heads, and many of the greedy ones who preyed on them (particularly mortgage brokers) walked away with a lot of cash and no repercussions.

We will all end up having to pay for that greed.

[xtine]

When a "friend" who is a mortgage broker told me that I could afford a 600K house on 50K a year I did a back-of-the-napkin calculation that left me with 500 dollars a month for food and bills, nothing for my son's preschool, and no retirement savings.

She said "No no! Your house IS your retirement. It will go up 7% a year! Then you refinance. And no one gets a 30 year fixed any more. That's like the bank telling YOU how to spend your money. With an option ARM, you tell the bank how you're repaying. You're the one in charge! You can get your payments down to 1500 a month."

I honestly had no argument for her. It was like a magic trick where you pick the 2 of clubs, stick it back in the middle of the deck, and the magician pulls it right off the top as if you hadn't just stuck it in the middle.

I changed the subject. I KNEW she was a magician and there was a trick in there. No way could someone on my salary pay that kind of mortgage (with 10% down, mind you). Either the whole deck was the 2 of clubs, or she had very fast hands.

So tell me, LA-Renter, do I sound extremely bright to you? Do I sound like I had a deep understanding of mortgage products? Or does it sound to you like I have common sense?

It's easy to blame the magician. But the audience meets the performer halfway.

(See a terrific article in the New Yorker last week by Adam Gopnik on the relationship between magician and audience)

[baruza]

He's right of course. It's too bad though that we don't hold Wall Street, America's great socialists, to the same rules. Bear Sterns shareholders are now looking at $10 a share, made possible by 29 billion ot the taxpayer's t-bills, and Wells Fargo CEO John Stumpf says, "I would not be averse to a Fed-assisted transaction," Stumpf said in a recent interview with the San Francisco Business Times. "Fixer-uppers don't bother us."
This is straight up blackmail of the federal government for public money. There are a lot of people that need to be made examples. Investment bankers should be first in line though.

[Ray]

Everyone is to blame. In the end, however, the choice remains the buyer's. No one forces anyone to buy a house, even if you've owned one in another state and then relocated to California for work. And if you have to buy in California, then buy something you can afford, whether it's a condo or a smaller home. Or you can rent. But buying something you can't afford is your choice, even if the lender is saying you can get a big loan for a bigger house. Only the buyer knows how much house he or she can afford, and if the lender is pushing a big loan, only the buyer can say, "That's too much."

[Tim K.]

sfvrealestate wrote: "So, that's a lot of new people chasing after the same number of rental properties. Aren't all those sheep for the shearing going to lead to rising rents?"

Short answer: No.

Longer answer: We haven't significantly added more housing, not added/lost population during this bubble. The only thing that has happened is people have traded houses with each other, and adjusted their expectations of what those houses were worth higher. That's all. Think of it longer term - if you toss someone out of a house, what happens to that house? It becomes *vacant*. Someone else moves in. That person moves from someplace else, etc... We're just going around in circles, trading places with each other. Long term, the amount of housing relative to people is the same.

[P J Evans]

What about people who already owned, but refinanced to get money to pay bills from last time the economy tanked, and are now in trouble? Should they have not bought twenty years ago? Who has 20/20 foresight?

(I really hate the assumption that *all* the people in danger of foreclosure are guilty of buying houses they couldn't afford. Some of them did, some refinanced to get money for school or remodels, some are speculators, and some are unlucky.)

[Kate]

LA-renter, why was renting "inconceivable" to your friends? That's not looking for shelter, that's looking for self-image. When we got married, my husband and I thought we'd be in our current apartment for a year and then buy. Four years later, we're still in that apartment. We could have bought a house, but now we'd be struggling. It hasn't been an easy four years, space-wise, but it's preferable to making a bad financial decision because of "bubble mentality."

[kat]

Thank you Xtine! You are a voice a reason in the real estate rabbit hole of SoCal.

[Lou]

LA Renter wrote:

"Greedy borrowers?! My acqaintances bought houses for shelter. Two colleagues moved to LA in 2006 and bought houses right away because (1) renting was inconceivable to them, and (2) the bubble-mentality told them that it was now or never."

Renting is inconceiveable to them? What is driving a Honda inconceiveable to them? Do they only drive Lexuses? They deserve to be bailed out because they have low self-esteem?

The bubble-mentality told them that it was now or never. Well that's there own fault. You know what the bubble mentality told me? THAT WE'RE IN A BUBBLE and prices will eventually go down.

You start you post out by talking about economics. Economics involve a thing called choice. Your friends made the choice to buy in a bubble-market when they could've rented. They need to live with the consequences.

[Michael Snyder]

The essential element Thornberg glossed over was the gross lack of integrity at the top levels of management. To be sure there's a long list of mortgage brokers I'd like to string together behind my truck & drag to Sacramento. but the worst of them could not have aided in building this crisis if they didn't have these "creative loans" to offer. It was top management that "created" these loans, it was top management who decided to lower underwriting standards and it was top management who decided to remove all traceability/responsibility from their packaged investment vehicles.
J Q Mortgage Broker certainly chased his YSPs to the limit & documentation, if there was any, was reduced to a bad joke. All of this was created and propagated from the boardrooms of major players in the financial sector. Not by "greedy flippers".

If insanity is to be defined as doing the same thong over and over while hoping for a different result, well you get my point. In my fifty plus years I've never seen more of a bad idea fix anything. I've yet to see any body involved in this crisis step up to the hard medicine they are going to have to swallow. Let's face it; left to "regulate itself" the financial sector and the people who run it are incapable of controlling their unmitigated greed. Sadly, the people we trust to keep them in check are addicted to the same substance and they are enabling their addict friends. Based on this I see no relief coming from any governmental or corporate action.

That leaves us with gravity. The longer and harder the financial brain trust in this country try to prop up their house of cards, the longer and deeper the inevitable "correction" will be. There is little or no confidence left at any strata in the financial sector and consumers have no choice but to stop spending. Which brings us to my favorite boogie man, oil.

The decline of the dollar against the euro and other major currencies can be traced back to the Fed's "creative accounting". Simply deciding to "remove a sector" from your accounting model in no way changes the realities that surround it. I don't know about the rest of you but the cost of food and fuel has had a major impact on my lifestyle and spending. I used to enjoy an evening out several times a week. Now I cook at home and before I go somewhere I'm thinking about how it cost me $20 to cross the SFV and come back. If you multiply my experience you'll see a raft of hurting small businesses that are soon going to add to the snowball effect as the economy collapses.

The myopia encouraged by Reganomics doesn't allow for an economic picture that goes beyond the DJIA and S&P but we all know better. Until a leader steps forward to make the hard choices necessary to control this crisis, we're going to see our economy tank across the board.

[Gary]

.........orrrrrrrrrrrr mr thornberg have you considered that many bought becasue they knew if they didnt buy soon they would be renting forever????? also, since when can you magically make your income equal the rise in housing. Lets put this idea to test. Whatever govt program pays your salary then we need to cut it by 20% to keep up with unnecessary watse in govt spending. and please, some govt money somewhere is paying your way. Dont kid yourself. your not that smart to be totally paid by the private sector. And of course BS and JPM didnt get a bailout either. I am sure thats your next story.

[Bubblewatcher]

Of course, Thornberg's right. Absolutely everyone who purchased a home in the past four years or so was a speculator to some degree, especially if they did so with the intention/necessity of refinancing because some real-tard told them "prices always go up" or that 30 year fixed mortgages are for "suckers".

But nobody wants to hear this. Look at La-Renter, who feels his acquaintances who decided to buy despite the high prices are "victims" because "renting was incoceivable" to them.

How about I decide that not driving a brand new car every year is "inconceivable" to me, La-Renter? Does that entitle me to part of some government bailout so that I can finance my new BMW every year?

Just asking.

[William Jones]

It's funny how a lot of people will easily believe that lenders, realtors, loan brokers, etc. are "greedy," but refuse to believe that individual borrowers could be greedy.

Anyone can be greedy - two year olds can be VERY greedy! Greed is simply desire so intense that rational judgement is suspended. If you borrowed so that you could live in your dream house without realizing that you could not afford it you were either (a) foolish or (b) greedy. I don't think government policy should reward either motive, but I am afraid I will be on the losing end of this argument.

[mike]

the bottem line

fry the people who bought houses they could not afford and put them in rental units in accordance with their now botched credit rreports.
higher rents for them and MUCH higher security deposits for their high risk credit profiles. AND NO PETS!

[Raul]

We have in the neighborhood a lot of empty houses, they were in the market for a long time, and they did not sell, lately they have been trying to lease them, without luck, Old people unable to take care of thenselves are moving too, leaving their houses. That shows you, we have more supply than demand, and all of them are waiting for a better time to sell....Now you know, the Banks have a lot of houses and more are coming.... And you know that 60% of the population of LA are unable to afford a house, the other 40% are already owners and some of them are in trouble.....That means we are going to have a soft demand for a long... long time. Unless prices go down drastically, just maybe another 40% on top of the 20% that went down already. Remember greed is out of the market, to make money in R E you would have to wait at least 20 years. Rents will go down for the same reason, 2 or 3 families are renting one house, and living there, sharing the kitchen and bathrooms, that is the beauty of human beings always able to adapt always able to survive....

[HouseRenter]

LA-renter,

Your colleagues were to blame in the same level as the lender who gave them the money. There's no other way around it. As far as the reasons you gave to prove that they weren't to blame...

(1) renting was inconceivable to them,

When people move to So. Cal from other parts of the country, they usually do so based on the higher salaries offered here. These salaries are usually offset by higher cost of living expenses. Most people who could afford a 3/2 house in a different market can only afford to rent (not buy) in LA... RENTING shouldn't be inconceivable to anybody, especially with the fact that you can RENT a single family home for half of what the mortgage on a similar home would be. Are you saying your friends were not to blame because buying was justified to protect their "homeowner" egos?

(2) the bubble-mentality told them that it was now or never.

If they were dumb enough to make a $650k purchase based on believing the fear tactics of a salesperson, then they deserve what they got... I RENT a single family home with a beautiful yard for my kids. Even though I make over $200k/yr and have no other debts, I decided that a $500k 2/2 home was way too expensive to carry with my income.

I'm sick and tired of hearing how "horrible" it is to rent. When you sign a mortgage, you're renting from the bank instead of an individual or management company, unless you believe there's price appreciation. If that's the case, you are SPECULATING that the price will go up, and you deserve the consequences that come with a housing downturn.

[Ace]

LA Renter 'Almost all the greed and gain --I estimate 95 percent-- was the lenders and mortgage dealers. Yeah, real estate agents got a cut too. But the bad guys here are the lenders.'

Huh? What is up with your calculator? When people were buying houses at outrageous prices, they only paid real estate professionals 5 or 6 percent of the price. The other 94 or 95 percent of the 'gain' went to the seller.

The buyers were the greedy ones by buying more house than they can afford on adjustable loans. People who bought sensible houses with a down payment and a 30 year fixed loan are not losing their houses.

[left of lefty]

the intro to the article says 45% of americans support some type of bailout. reading the comments in this blog, i thought that number would be closer to 5%.

i think some type of bailout is necessary to prevent the collapse of the mortgage market. the fed has dropped rates like a hot potatoe, yet mortgage rates have gone up. banks are really scared of lending right now. last week on kpcc, a mortgage broker claimed that banks are taking an automatic 5% discount on any appraisals they get. a guy called in claiming to have an 800 fico score and couldn't refinance 350k on a home appraised at 500k. banks will continue to hold back without some type of confidence that prices won't drop further. put yourself in the lender's shoes and ask if you are willing to make the loan when prices are falling and underwater borrowers simply mail in their keys.

if this continues, prices will definitely drop. however, what good is a 300k median if the only loan product available requires 50% down and 30-year fixed at 15%? then the only people who can afford to buy are the rich folks who can write the big checks. it'll just further divide l.a. into a city of the haves and the have-nots.

btw, 50% down is not unusual in other nations where home prices are unstable. and 15% rates were normal after the last time oil prices shot up in the 70s.

home prices are now doable for a family making 120k a year (not that unusual in socal), assuming they have good credit and saved a modest down payment of 100k or so. this is the sweet spot. if prices go up from here, it'll be hard to get a mortgage. if prices go down due to the mortgage market collapsing, it'll be hard to come up with the down payment.

[Inland Empire]

Think of it longer term - if you toss someone out of a house, what happens to that house? It becomes *vacant*. Someone else moves in.

Eventually, yes. In the short term, no. The banks are hanging onto a lot of houses for much longer than they really need to. Thus there are housing units all over with no one in them. The old owners have to go somewhere. Its usually into the rental market.