walkitout (walkitout) wrote,

equity immigrants, or, I show my age once again

Once upon a time, back in the 1980s, people used to call the house I lived in then (as a child) in what is now Shoreline, WA, but was then unincorporated King County with a Seattle address. They'd ask us if we wanted to sell the house. Don't get me wrong. We weren't selling the house (my parents still live there, and the house will presumably eventually be sold by my older sisters when my parents die). But boy people wanted to buy in our neighborhood and they were willing to offer what we regarded as completely ridiculous prices -- like, $200,000!!! My parents had paid something like $30K in 1968 before I was born and never refinanced their 30 year fixed mortgage which had 6% interest. You can sort of see where some of my ideas about finance might come from.

In any event, a lot of people were moving in to the suburbs north of us. Malls were being built where once there were fields and -- oh, you know how this goes and you so do not care.

A lot of the people were specifically moving up from Southern California. They had sold an even more expensive, smaller, crappier and in every way worse house down there and were shopping in the Seattle market with what was basically funny money, driving our prices up. This has happened in waves a few times since then. Basically, SoCal goes up, some people move to the Beautiful Pacific Northwest (having visited once when the sun was out and not realizing the suicide risk induced by the extremely northern latitude combined with near constant cloud cover) with their inflated equity, pay too much for houses around Puget Sound, the bubble collapses in SoCal, but takes longer to deflate in Seattle, inducing much speculation about how Seattle is Immune to Real Estate collapses, blah, blah, bleeping blah.

Why does Southern California tend to generate funny money? (We understand how money can move from California to Washington. Everybody likes the folding green stuff and electronic representations thereof.) Because Southern California is prone to hordes of people moving in (and moving out). When hordes move in, too many people are trying to buy too few houses. This begets building booms (hence the crapitude of much of the housing), "affordability" products from the mortgage industry, etc. But more specifically, too many people chasing too few stuff = price increases.

Normally, prices cannot go up forever: people run out of money. And that's where the "affordability" products come in. You know them now as subprime, alt-a, jumbos, seller-financing, blah, blah, bleeping blah. But all of them are designed to keep the bidding wars going. And _that_ is the real problem. If, when too many people moved to SoCal, instead of there being endlessly more houses for endlessly more money, there was a limit to the money and a limit to the houses, there would be a limit to the money on offer.

You might say, well, before there were affordability products from the mortgage industry, there were companies willing to pay larger amounts of money so their employees could afford to live in the area. And that's kind of annoying too, for several reasons including the general increase in "luxury culture" -- if you pay someone enough to buy a 1.n million dollar crappy 3 bedroom house, it should not surprise anyone that paying for a Subzero and Granite Countertops starts to feel like noise. There's a hard limit on how much companies can increase their employees pay, and that basically amounts to, can we move the company somewhere else where it's cheaper to live and still function, vs. if we pay the employees any more money, no one (not even our employees) will be able to afford our products. One of these two things kicks in pretty quick. (Usually.) If neither one kicks in, the ultimate affordability factor eventually will: the wage slaves the rich folk desire are unavailable in the area because _they_ can't afford to live there.

"Affordability" products, in their simplest form, rely upon the idea that the lender is taking crazy risk, but it is okay because that house is worth a lot. This is just another version of as-long-as-there-is-another-sucker, and we know how that ends: badly, except for the people who get out early and move to Seattle. Better informed and more experienced people than me have shown how this kind of thinking ratchets housing prices higher and higher and higher, until instead of a few people needing affordability products to participate in the market (which is really what they were for, before they became Southern California's Bitch, and a source of endless whining in the Pacific Northwest about immigrants from California -- and we _meant_ the white people. While I personally did not key the beamers they drove up from Land of Ridiculously Expensive and Too-Shiny Cars, I could certainly understand why other people did.), _everyone_ needed affordability products to participate in the market. Shortly after that, the seemingly endless supply of suckers dried up.


So whenever you heard someone justify "affordability" products, whether jumbos, alt-a, subprime, ARMS, etc. as necessary in expensive housing markets, you should immediately think: Get 'Em! Because that person is the scout for Teh Evil.

If you want to blow bubbles, the dollar store has 'em cheap. Target has 'em in quantity. Do not do this with real estate any more. Please.
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