[V8] C4 (microscopic Audi content)

[Mike Arman]

In my chequered past, I taught small business management at a local community college.

Part of the spiel went something like this: "If you want to sell your product or service, you must 
appeal to the big five human motivators, and the more of them you appeal to, the more successful you 
will be.

"The five human motivators are Fear, Sloth, Lust, Greed and Envy. We'll disregard Gluttony because 
MacDonalds has that pretty much locked up.

Now lets look at how the big five applied to the mortgage melt-down/blowup.


Fear - everyone is getting rich, I don't want to be left behind

Sloth - I can get rich without doing any work at all, just by living in my house!

Lust - (hey, four out of five wasn't bad, look at what we did with only four out of five!)

Greed - I want to be rich so I can buy all kinds of stuff, doing these real estate deals is easy 
riches, all I have to do is wait!

Envy - Joe Schmoe made a fortune in real estate and he only has a fifth grade education! I'm a lot 
smarter than him and I want to live in a bigger house than he does and drive a fancier car - I 
deserve it!!!


Here is a partial list of the upward pressures on real estate prices:

Sellers want to make a quick profit, maximize selling price - upward pressure from cocktail party 
conversations (lies), media reports (bullshit) and TV shows like "Flip This House" (bullshit cubed).

Real estate agents benefit from higher commissions - 6% of $400,000 beats the crap out of 6% of 
$70,000 and it is the SAME amount of work!

Appraisers found unless they appraised to a target price, they'd lose business to appraisers that would.

Mortgage brokers benefit from higher commissions as well - two points on a $400,000 loan beats two 
points on a $70,000 loan, and it is the SAME amount of work! As people became sensitized to "evil 
points" the points changed into fees (some overt, some hidden) and then you could get a loan with 
"no points!!!" - so the *PERCEPTION* was that this was easy money.

Lenders benefited from the increased volume of loans - remember that Wall Street has an insatiable 
appetite for ANY financial instrument that can be 
collateralized/securitized/packaged/homogenized/painted green and SOLD to hungry and not very 
discriminating investors based on utterly fictitious "Quality" ratings - yes, you can BUY a grade 
for the proposed investment package you want to sell!

Credit card companies benefited because everyone thought they were doing really, really well and the 
party would never end - real estate ALWAYS goes up, right? They aren't making any more land and the 
time to buy is NOW. (Ever notice that the time to buy is always "NOW"?)

Wal-Mart benefited because people spent a LOT of their (illusory) wealth on flat screen TVs and 
other non-durable goods, HomeDepot/Lowes benefited from all the people doing fix-ups, spruce-ups and 
pimp-ups of houses for all kinds of reasons. China benefited because a LOT of this stuff was made in 
China.

The state and local governments benefited because higher property values means higher property taxes 
and the government's appetite for money is utterly insatiable . . .

Builders, contractors, tradesmen, suppliers all set records because of the insatiable demand for 
ever larger, ever more expensive homes which people were convinced they could afford and had a right to.

Win, win, win, win, happy, happy, happy, happy . . . .




Here is a list of the DOWNWARD pressures on real estate prices (during the boom)


1) Alan Greenspan's comment that "there is a certain amount of froth in the housing market". 
Greenspan has the reputation for taking difficult concepts and making them totally unintelligible. I 
interpreted his comment to mean "Get the **** out NOW, run, hide, we're all gonna DIE!!!!" and it 
seems I wasn't too far off. Most people ignored him, they don't like to have their parades (or their 
cash flows) rained on.

2) Me - I kept telling people that these loans were unsustainable and this was all going to blow up 
sooner or later and it would be REAL messy when it did. I *stopped* writing residential loans in 
2005, I refused to be a party to this madness. Most people ignored me, too, they don't like to have 
their parades (or cash flows) rained on. (I also don't seem to be as well known as Mr. Greenspan.)

3) . . . Bueller . . .  Bueller . . . Bueller . . . ?



Who lied and who didn't know what they were doing?

Lenders misrepresented their offerings - low or no money down, easy payments (for a while) - the 
ominous "reset" date is safely far in the future by which time your house will have appreciated into 
the stratosphere anyway and you'll be making so much money that the payment will only be sofa money 
- don't worry, be happy. (Besides, we're selling your loan anyway, so if it goes sour, we don't care!)

Mortgage brokers both misunderstood and misrepresented the offers - yes, there were some who would 
tell you with a straight face that people DO spend 80% of their income on housing . . . then there 
are those who never did the math and didn't realize these loans were unsustainable and the house 
prices were a huge bubble about to burst.

Real estate agents told people they were making an INVESTMENT, not "spending money" and strongly 
implied that anyone who didn't get on the wagon as soon as possible was a total fool and was doing 
their family a great dis-service. When you BUY something to USE, you are spending money. The 
psychology behind this is "fools buy things, smart people make INVESTMENTS, so which are you?

Wall Street - they'd be willing to sell bags of shit in pretty packages if they thought they could 
make a profit - oh, wait, they did!

The consumer, the buyer, the poor schmucks who got hammered when this all blew up . . . most of 
these people were acting in what they thought were their best interests (Fear, Sloth, Lust, Greed 
and Envy) but they are NOT experts - they bought the "INVESTMENT" line hook, line, sinker and the 
fishing boat as well. "Everyone" is making money in real estate, we want to also (lemming effect). 
Some research and clear thinking would have kept people out of this particular disaster - but 
research and clear thinking are diametrically opposed to the Big Five.

Unfortunately, a lot of people were pushed into loans that everyone KNEW they couldn't afford and in 
more than a few cases didn't even understand. Deltona (Florida) has an extremely high foreclosure 
rate, even for Florida - and many Deltona residents are recent immigrants who don't speak or 
understand English very well, but wanted a part (more specifically THEIR part) of the American 
Dream. (Hell, I DO speak English fairly well, and *I* don't understand some of the parts of these 
mortgage documents - actually I do, it translates into "You're gonna git screwed!")

Many of these borrowers were also relying on the "experts" to keep them out of trouble - expert TV 
shows and media reports which convinced them that real estate investments were THE express way to 
fame and fortune, expert real estate agents who know what the property is worth, expert appraisers 
who back them up, expert lenders and lender representatives (banks, non-bank lenders and mortgage 
brokers) who will put them into a loan that fits them perfectly (more like an Iron Maiden, you get 
to fit it).


So - where do we go from here?

1) Spending more than 35% or so of your annual family income on housing is risky. Until REAL WAGES 
rise in the USA (and the trend is flat or even downward), house prices cannot go up either. This 
means people will have to live in houses that are smaller and have fewer amenities than the 
McMansions they see on TV.

2) Many of these overpriced homes have seen their selling prices collapse dramatically, sometimes as 
much as 50%! Foreclosures bring yet more houses to a saturated and frozen market (remember that it 
is very difficult to get ANY loan right now!!!), and when supply exceeds demand prices fall. When 
supply dramatically exceeds demand, prices fall spectacularly.

3) JP Morgan said "Buy when there is blood in the streets." Well, in the housing market, there is 
blood in the streets - lots of it. Buyers, sellers, builders, contractors, tradesmen, bankers, 
appraisers, real estate sales people, mortgage brokers, EVERYONE involved in the "shelter" business 
in any way is HURTING, BAD.

4) With blood in the streets there are deals to be had . . . if you have CASH. People need to live 
someplace, if they can't buy, they will rent. Remember that the rents you will charge can't exceed 
35% of the income of the people you hope to rent to . . . and that will partly determine how much 
you bid to buy. Rental properties are now a whole 'nother game - in the "good old days" people 
bought something, let the rents pay the mortgage and took their profits out when they sold the 
appreciated property. Well, without appreciation, and we likely aren't going to see much 
appreciation in real property for a decade (!), rents have to support the property - you need 
POSITIVE CASH FLOW, and for many rental properties, that is just a fever dream at best.

5) There are a few profitable niches in the real estate business, but for the most part the days of 
"Buy something, anything at all, and you'll get rich by breathing" are OVER. (Until the next time.) 
If you are nimble, smart, careful and lucky (luck is not a strategy), you can make money in this 
market. My own game plan is to let things settle down for a few years before I go back to playing 
mortgage broker. I'll make some exceptions for exceptional circumstances and particular deals, but 
this isn't going to be my day job for a while. (Fortunately, I have other incomes.)


And before you make ANY investment in ANYTHING, read Charles McKay's book "Popular Delusions and the 
Madness of Crowds". You will howl with laughter - until you look in the newspapers. What he wrote 
200 years ago remains true today.

Now I'm going to go see if my V8 will start (required Audi content).


Best Regards,

Mike Arman
90V8Q