Have we learned our lesson in the San Diego Home Loan Market?

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At a recent presentation on the San Diego mortgage market, during the Q&A portion someone asked if I thought we had learned our lesson from all the housing fall out and if could we avoid a repeat of the run up and subsequent crash of real estate.  Sadly, I had to immediately answer no.

I definitely believe the millions of people nationally and tens ofthousands in the San Diego mortgage market that were stung, and continue to be stung, by real estate will have a long memory about how much these times
hurt.  It’s a reality that will haunt many of us for years to come.  But, let’s take a look at a couple reasons I believe we, the collective capitalist US, are likely to allow/participate in another financial train wreck.  Let’s take a look at just the last 12 to 15 years.  I see several very good examples of bubbles rising to amazing heights only to explode in an infamous ball of flames.

Anyone remember the late 90’s and early 2000’s when we had a “new economy” that was built on technology?  All major equity indices were soaring to new heights and tech entrepreneurs were becoming “paper” million, or even
billionaires at an amazing rate.  There was just one problem, a huge percentage of these companies had little to no revenue.  Not surprisingly, when we look back, the new economy couldn’t be supported by companies generating no
revenue.  The argument for taking these companies public at insane valuations was fundamentally flawed and based purely on speculation of future revenues and the potential opportunity to make a quick buck.  Very naïve day traders and institutional investors alike were investing significant sums of money in startup companies they knew very little about other than the fact that the media hyped the companies as the next great technology.  No wonder that bubble burst and most of the would be millionaires were once again working class Joes.

Then we had the oil bubble of 2008.  For reasons only the big investment banks could explain, oil ran up over $140/barrel.  As a result gas prices were well over $4/gallon.  This is very much up for debate, but my opinion is that the speculators were solely to blame for the amazing run up on prices.  There was talk of oil going all the way to $200/barrel.  But suddenly the market came to its senses and oil dropped over 50%.  Many of the same parties that made money on the way up were now making tons of money betting against oil on the way down.  That looks like speculation and market manipulation to me.

We don’t need to spend much time talking about the real estate bubble of last decade, but it’s well documented that bubble was created by unsustainable mortgage products created by the investment banks, which were being sold by mortgage originators making big money, which were being sold to home buyers with no qualifications but eager to jump on the band wagon, which builders were fueling with beautiful new homes readily for sale, which…well, let’s just say everyone was on board to some degree willingly or otherwise and we know how that ended up.

What has changed that will stop the next bubble (maybe gold, look at oil today, will it be real estate again soon)?  As long as we have a system where huge financial entities can make money on the way up and on the way down we will see bubbles.  I see zero evidence that influential financial companies in the US have been forced to make change, and based on the political system today, I have just about zero hope for significant change anytime soon.  With three major bubbles in a decade, it seems obvious to me that there is little interest in change from the entities that can really influence it.

Real estate has made up between 2% and 6% of the gross domestic product for the last 60+ years.  It’s hovering at the very low end of that range right now.  Wherever real estate is in that range it’s a huge amount of money.  With  that much money at stake, real estate will always be a target for the next bubble.  What are you going to do to avoid getting caught up in it next time?

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