Well..How Did We Get Here?

David Byrne of the Talking Heads isn't just a genius. He very well may be a prophet. We all should have paid closer attention to the lyrics of "Once In A Lifetime" and "Burnin' Down The House" before 2007. It would have been better than having a crystal ball.

And you may find yourself behind the wheel of a large automobile…

It's easy to blog-n-rail on the culprits of our current, painful, economic mess. The usual suspects are marched through the lineup: Wall Street, corrupt politicians, the Federal Reserve, deregulation, the Rich, speculation, the media, conspicuous consumption, and the list could go on for days, weeks, or years.
If you were to take all of the guilty out to the courtyard to face a Spanish Civil War style firing squad, you will definitely need plenty of bullets, blindfolds, and cigarettes. In the final analysis, though, easy access to credit on both the commercial and consumer level gets to wear the hair shirt. Post 9/11, the auto industry opened up the hydrant with zero percent financing. I'll admit, I drank some of that Kool Aid. I later escaped from that scenario by the skin of my teeth thanks to four dollar a gallon gasoline and some fuzzy math on the back of a Steak-n-Shake menu. Our family bought a blinged out, Sport Utility Behemoth around 2004. "Hey, zero percent, that's a deal!" I thought. The reality was that this was the largest monthly car payment (in excess of $500) our household had ever shouldered. Our mortgage payment has always been around $900 (we're different; we've lived in the same house for 16 years. More on houses in a bit). This meant that the car payment was more than half of the mortgage payment. We were paying an ass load of money for an "asset" that lost $5000 in value the minute we bought it versus what I considered a modest payment on an asset that seemed to be appreciating in value. Or at least, so we thought.

And you may find yourself in a beautiful house…

As a consumer, I never really understood the housing bubble. As a professional, I understood it perfectly. My wife and I came very close to building a house pre- 9/11. We had purchased a lot down the street from the house we still live in. The lot was financed by, drum roll please, home equity, which, naturally would be paid off when we sold that house. We never even got past the house plans selecting stage of the process. I seem to remember every conversation ending with me saying "Well, I'm sure you and your next husband will love that house." Some couples can build a house together. Some can't.

While we were arguing over French doors, two planes smashed into the World Trade Center and changed the world as we knew it forever. I was concerned about the financial future, so, we agreed to sell it. A handsome couple with matching bleached teeth and tasteful cosmetic surgery, who lived around the corner, bought it for what we paid for it and built a McMansion. Good for them. That's the extent of my participation in the housing bubble. My wife would always comment about how cookie cutter all of the newer neighborhoods looked. If you were paying that much for a house, wouldn't you want something unique? Again, we moved in to our house in 1993. We're still there. Our oldest son just turned 10. I plan to stay there as long as I can walk up the stairs.

Hold tight, wait 'til the party's over/Hold tight, we're in for nasty weather...

Okay, I'm jumping around a bit. David Byrne was equally and frighteningly prophetic in "Burnin' Down The House", which I always thought was one of the Talking Heads' weaker offerings. It was a smash hit. Shows you what I know. And that's why I play Rock Band with my sons instead of playing Budokan.

My professional understanding of the Housing Bubble was crystal clear: greed and stupidity which is usually the gas that inflates most financial bubbles. I was fortunate in that I got to watch the financial fall out from the bursting of the Tech Bubble in real time from the trenches. Greed and stupidity were smoking crystal meth and taking steroids. One of my favorite quotes from a client while I tried to discourage him from taking a position in some stock that had a "dot com" in the name and was trading at $110 a share (and the company would NEVER earn any money) was "Yeah…I know. But technology's gonna stay." Really? I thought it was going to hang out for a bit, leave with someone else's date and we'd be left holding the bag, in the dark, and communicating via smoke signals. I had a pretty good idea before but that conversation confirmed my belief that things were going to end badly.

So, when things did end badly (2000-2002), where did a well informed thanks to CNBC, Money magazine and the rest of the financial pornography, put their money? Ah yes…land. They weren't making it any more and property values always seemed to be heading northward. Best of all, you didn't have to worry about the wild swings of the stock market and you could even get rental income. If I had a dollar for every client that pulled money out of financial investments to go into real estate, I'd have about a hundred bucks. Don't laugh. I can stretch a hundred dollars like it was a piece of Super Bubble.

I would ask clients if they were afraid of the iliquidity real estate presented. It was really more of a suggestion and, no surprise, one that fell on deaf ears. Now, let me make a clarification. These were non-professional real estate investors: doctors, dentists, small business owners, trust fund babies. Throughout my career, I've been fortunate enough to work with a hand full of smart, successful, and prudent commercial real estate developers. They understand risk completely and manage it accordingly. They build distribution hubs for shipping companies, class A office buildings, or real shopping centers anchored by big box clients. The aforementioned amateurs wanted to flip houses, buy rent houses, do condo pre-sales, or waterfront property. If they did venture into "commercial" real estate, it was developing a slapped up strip mall anchored by a Subway and a nail salon. 98% of the time, they paid too much for the dirt as well. "But, its just gonna keep going up". One: take loaded gun. Two: insert in mouth. Three: pull trigger.

Then came the "Everybody's A Homebuilder So I Can Have A Contractors Account At Home Depot" boom. Everybody was a building a "spec" house. That would be a house you built, usually with borrowed money, before you had a buyer with a goal of selling it before completion for a gain. When I say "EVERYBODY" I mean, almost literally, everybody. People from all walks of life: retirees, firemen, the guy who runs the cafeteria at you kids school, mother in laws, brother in laws, mother in laws AND brother in laws. Now, I would be the last person to scoff or discourage anyone from dreaming the American dream, but sometimes it pays to stick to one's knitting. A lot of the behavior I witnessed during the "Everybody's A Homebuilder So I Can Have A Contractors Account At Home Depot" boom, at times, matched the frenzy of the Dot Com Bubble. This guy was making money hand over fist or this person knocked the cover off of the ball and has a huge boat and house at the beach now.

Everybody associated with the boom made an assload of money: realtors, the photography studios that had to take those glam shots of the realtors, the guy who made the magnetic signs to stick on the doors of realtors Lexus, the Lexus dealership, etc. etc. It’s a safe bet that the beneficiaries of the beneficent fallout were building spec houses, too. The difference was that people were rolling the bones on a tangible, yet, highly illiquid asset. A ticking financial time bomb with granite counter tops, if you will. Eventually, bombs explode and destroy shit.

Into the blue again. after the money's gone...

Ah, back to "Once In A Lifetime". The money partied like Pacific fleet sailors in Thailand on payday. Watching from my professional perch, I could spot signs that things were at or near full tilt boogie. A prospective client was referred to me and my partner. He was a 28 year old salesman who worked for a large commercial lumber distributor. He had made $329,000 that year. Selling wood. Not curing cancer. Selling wood. Apparently, I picked up the wrong brochure on career day. Again, I had a sneaking suspicion things were going to end badly.

My God! What have I done!?

It ended very badly. We filled our shiny new houses and driveways with shiny new stuff. And here we are. Overextended, overbought, overpriced, over stimulated, bowing to the neon (or plasma) god Simon and Garfunkel described in the "Sounds of Silence". Where do we go from here? Maybe the Talking Heads got their prophecy fulfillment on in the tune "(Nothing) But Flowers"

This was a Pizza Hut
Now it's all covered with daisies
you got it, you got it

I miss the honky tonks,
Dairy Queens, and 7-Elevens
you got it, you got it

And as things fell apart
Nobody paid much attention
you got it, you got it


Same as it ever was. Same as it ever was.