Cracks Begin to Show in US Housing Market

Bill Bonner - Fri 21 Dec, 2007

Driving down Route 4 in Southern Maryland, we passed a sign advertising a new housing development. So many are the new houses weeding up in the greater Washington, DC area that one hardly notices another one. But the sign caught our attention: The Wow Factor it said, in large red letters. The houses were just like all the others built in the last 10 years with large, fraudulent fronts, laid up in brick, some with tall Tara-like columnsand front windows so large you bend down to look for a stone. You think they might be substantial, handsome houses. And then you see the vinyl siding and small, plastic windows on the side. They only look good from the front. And then only if you dont look too hard...

Driving down Route 4 in Southern Maryland, we passed a sign advertising a new housing development. So many are the new houses weeding up in the greater Washington, DC area that one hardly notices another one. But the sign caught our attention:

“The Wow Factor” it said, in large red letters. We looked beyond the sign to see what the wow was all about. The houses were just like all the others built in the last 10 years – with large, fraudulent fronts, laid up in brick, some with tall Tara-like columns…and front windows so large you bend down to look for a stone. You think they might be substantial, handsome houses. And then you see the vinyl siding and small, plastic windows on the side. They only look good from the front. And then only if you don’t look too hard.

Charmless…soulless…hasty…slick…they are stacked hard up one against one another like Chinese TVs in a discount mall.

“The ‘wow’ has to come at the very beginning,” explained a real estate developer from Miami. “You bring someone to a house…he’s got to say ‘wow’ in the very first two minutes…or you won’t make the sale.”

A couple of years ago, he was building $4 million dollar houses on a golf course in the Boca Raton area. What did you get for $4 million in America those days? A lot more than you got in the UK…but still nothing a person with a sense of dignity would want. The houses were crowded together and then covered in tropical plants so you couldn’t notice how tiny the lots were. Just as with the houses in Maryland, the facades pretended towards substance, but it was substance they most lacked. The fronts were built of stone and marble. Then, you opened the door and the entryway took your breath away. Wow. You felt as though you were in a Florentine palace…or an abandoned bank. The place had so much marble we thought we were inside a quarry. And the ceiling was a good 24 feet in the air…with wide, curved stairs winding to the upper deck; still there was something cheap about it…fake…like a Hollywood set. It was the kind of staircase Rhett Butler might have carried up a checkout girl.

“Wow,” we said. We had never seen a place so extravagantly hideous.

“Yeah…it’s all in the first impression. But so what? That’s what people want. And then it goes up in price…or, at least it used to. I made money. The buyer made money. It was a win-win situation.”

Behind the first impression was a rather pathetically extraordinary house, the kind a sports star might build. It had, for example, a huge master bedroom, with a bathroom as big as Penn Station. We looked up to see if there might be mirrors on the ceiling over the bed. No…the new owner would have to put those in himself. Off to the left was a more practical feature - a balcony; as the housing crisis deepens, a mortgage-stretched owner could throw himself off…and drown himself near the 18th hole.

“Are these places still selling?” we wanted to know.

“Nah…nobody can get financing…” 

In the heyday of the credit bubble, financing houses became as fraudulent as the facades. A recent study by Fitch’s found hanky panky in practically every one of the 45 sub-prime files it examined. Between 2000 and 2006, the FBI’s suspicious mortgage reports rose nearly 800%. The gumshoes estimate that mortgage fraud cost lenders as much as $4.3 billion last year alone. 

The homeowner lied about how much he earned or how much he had; the appraiser lied about the value of the collateral; or the mortgage company lied about the terms of the loan. Sometimes all of them lied to each other. And then, along came the Wall Street packagers who told more whoppers. Bundling up thousands of fraudulent mortgage contracts they somehow managed to get the stuff rated “investable” grade, a lie so spectacularly in-your-face it practically knocked your nose off.

First impressions were everything. Executives were paid hundreds of millions to perform cosmetic surgery – trimming a little fat here…putting in a little silicon there. Billions poured into hedge funds too – in which managers were paid enormous sums for hocus pocus investments that were no more than “heads I win, tails you lose’ bets with other peoples’ money. And private equity was another hot trend. But what were the private equity surgeons doing except nipping and tucking? Balance sheets and earnings were pimped up…until the old girl could be put back on the streets.

Everybody wanted a piece of the action. The gaudy, sensational, trendy, hollow, superficial – it all moved up in price – from the suburban ghettos of Calvert County, Maryland, to the A shares on the Shanghai stock market. And there was no point in arguing with the people who were buying this garbage; they were geniuses and had the money to prove it! Towards the end, you had to be a moron to make money, because it was the worst investments that moved up most.

In the art world, for example, the Great Rubbish Market swelled up prices on corrugated tin and dead animals. The idea was to make a big impression – fast. And nothing made a bigger impression than big money. Damien Hirst’s diamond encrusted skull was just a silly gimmick. But it wasn’t so much that the oeuvre itself caused the wow…it was that some numbskull had paid $100 million for it.

What did the IPO come out at? How big was his bonus this year? How much did that house down the block sell for? How much is the stock up? Wow.

What a surprise it must be when it comes to an end…and the headline numbers go down.

Regards,

Bill Bonner
The Daily Reckoning

Editor’s note: Bill Bonner is CEO of Agora Inc. and Fleet Street Publications, publisher of MoneyWeek. He is also the author, with Addison Wiggin, of the New York Times bestsellers Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets with Lila Rajiva.

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