Tuesday, October 28, 2008

Drinking the Kool Aid

When someone completely buys into an idea it is often referred to as drinking the kool aid. During the housing bubble there were a couple different flavors of kool aid - the house values only increase, the withdraw all the equity, and the ever popular debt is wealth flavor. While none of them make sense now the were very popular at the time. MarketWatch has an interesting post up titled We have met the enemy and he is us that sums up some of the most interesting excesses (kool aid flavors) from the Great Housing Bubble. Here is our 5 favorites from the bullet list -
  • If it sounds too good to be true, it probably is. Turning to homebuyers, many people bought more house than they could afford, thanks to adjustable interest rates that were expected to remain low indefinitely.
  • What goes up must come down. These people also believed that rising home prices would enable them to pull equity out of their homes, while refinancing into a fixed rate. But as we now know, nothing rises forever.
  • Home is where the heart is. Forgetting that a home is first and foremost a place to live, many people began thinking of their houses as investments and as piggy banks, and thus made decisions that they might not otherwise have made. Even to this day, some homeowners think it is wrong to owe more on their mortgage than their house is worth; that's why they walk away from it. Hello? Don't they realize that they need a place to live?
  • What, me worry? Home prices have gone up every year since the Great Depression, so it's OK for me to spend more than I earn, since all I have to do to make up the difference is to take out a home-equity loan.
  • This time it's different. There may have been bubbles in the past, but it can't happen to housing, since all real estate is local and, at any rate, people need a place to live (See Home is where the heart is, above).
Looking back it is hard to believe so many people bought into it. One that did not make the list was to jump in now (now being 2005-2006) while you still can. Prices were going to keep rising at double digit rates indefinitely. The fundamentals were strong. The economy could handle this. Besides there is global trade now so a little bump caused by the US housing down turn would not have much of an impact.

What flavors are we drinking now?

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