The Failed Intervention: A Morality Play in Three Parts
The Daily Reckoning PRESENTS: Some of you may recognize today’s DR essay, published first in April of 2005. It never hurts to be well acquainted with one’s past…even if that past happens to include mistakes. At the height of the housing boom, many mistakes were made…and made again. This ‘play’ written during that time, offers some insight into what those who made themselves players in the biggest bubble of all time were thinking. And perhaps you’ll learn a little something from it. Read on…
CAST OF CHARACTERS:
A.W. (a.k.a. Renter #1)
T.D. (Renter #2)
K.I. (Renter #3)
L.S. (Unwitting Speculator #1)
C.D. (Unwitting Speculator #2)
M.N. (Real Estate Investor)
A.P. (30-Year Fixed Rate New Homeowner)
Chorus: Café patrons and waitresses
TIME and SCENE: Mid spring 2005 A.D., our great nation is in the throes of a tenacious housing bubble. Whole cities have been tantalized, wooed and seduced by this Siren song of easy wealth; entire populations rendered giddy by profits… on paper. Nearly every conversation heard around the dinner table… across the bar… in a cab… is focused on one subject: the housing market.
The scene opens in Café Hon, a locally famous Baltimore eatery in the trendy suburb (sic) of Hampden, where big hair and gaudy make-up are curiously in vogue and admired. Seven colleagues from the Daily Reckoning’s HQ are seated around a Formica-topped table.
Lacking an additional 30-yr fixed mortgage holder, the table less-than-fairly represents the breakdown of mortgages nationwide: roughly 60% fixed rate, 40% ARM… 25% of all new mortgage originations in 2004 were real estate investors.
LS (Unwitting Speculator #1) is closing on a house the following day. Mere hours stand between her and the single biggest financial transaction of her young life. Can those stalwart pessimists (Renters #1, #2 and #3) lash her to the mast in time to save her from the Siren’s tantalizing tune? We shall see, dear reader… below…
ACT I – A MORTGAGE BROKER’S WET DREAM
Renter #1 : Hey, LS… I’m going to ask you one question. Your answer will determine how much I speak for the rest of this meal. Is your loan… an adjustable-rate mortgage?
Unwitting Speculator #1 : Not at all. It’s interest only.
[A gasp is heard. Ominous Lon Chaney-style horror music rises from the background.]
Renter #1 (face wincing): Why… why?! [Screams of horror coming from the kitchen.]
Unwitting Speculator #1 : What?! I was tired of throwing away money on rent every month. I wanted to invest in something real… and build equity. Besides, we’re going to sell in five years, anyway. So we’re cool.
Renter #2 : That doesn’t make sense. You are still throwing away money. The only difference now is you pay a finance company instead of a landlord.
Renter #3 : And what if you can’t sell in five years… doesn’t that make you nervous?
Unwitting Speculator #1 : [muffled unintelligible remarks… something about the location of the house…a leafy street…children on bikes…speed humps… shiny happy people… yada, yada…]
Renter #3: Answer the question. What if you can’t sell?
Unwitting Speculator #1: Well… I am a little nervous. [nervous laughter] We’re risking a huge amount of money… more money than I’ve ever known. But hey, you only live once!
Unwitting Speculator #2: Oh come on LS, don’t listen to them. I have an interest only mortgage, too. [More gasps of horror. Another burst of Lon Chaney music.] These guys are all gloom and doomers. Remember, they work for The Daily Reckoning.
[Renters’ heads snap in unison to glare at Unwitting Speculator #2]
Renter #1: And…what about you, AREN’T YOU nervous?
Unwitting Speculator #2: Nope. I try to take life one day at a time. I don’t look that far ahead. I’m doing okay right now… and besides, in 5 years, I hope to be married.
[Unwitting Speculator #2 holds up both hands with her fingers crossed. Smiles.]
All (in unison): Awwww.
Unwitting Speculator #1: Don’t you know it’s bad luck to cross your fingers with BOTH hands?
ACT II – UNSEEMLY PROFITS
Real Estate Investor: What about you Addison, why do you rent?
Renter # : Well, we live down by the water… in the neighborhood we want to live in… and to tell you the truth, I just don’t understand the market anymore. Let me give you an example.
When we lived in the same neighborhood before moving to Paris back in 2000, the house across the street went on the market for $97,000. The price was so high, everyone thought the owners were nuts. It was a different time. A friend finally bought the place for $87k, gutted it and started renting to college students.
We moved to Paris for four years. Last year, when we were moving back, we looked for a place to buy in Fell’s Point… low and behold, we saw the same property on the market. Guess how much?
All (in unison): How much… tell us!
Renter #1: $357,000. [Renter #1 moves his hands to his hips in disgust. Nods around the table.] A four-fold increase in just as many years!? Tell me, what market – any market – can sustain that kind of growth?
Real Estate Investor: Hey, a lot of people I know would say that’s still cheap. Besides, it sounds like you were a damn fool to move to Paris. You should have held on for the ride. Still, I think you’re right. The market is getting frothy… that’s why I just sold my Baltimore properties.
[Puzzled looks of intrigue.]
Renter #1: Yeah, that’s probably a good move. You bought in nice and early, and now you’ve sold near the top. Then you put the proceeds into a resort property in West Virginia… everyone knows that’s an undervalued market.
[Fiddle-heavy blue grass music wafts from the kitchen. More nods of agreement around the table.]
Real Estate Investor: Yup. The price is up already. We only put ten percent down, but by the time of closing we had accumulated enough equity, the bank said they weren’t going to require mortgage insurance. We’d already amassed an additional 10% of equity!
30-Year Fixed: Hell yeah! We made over $30,000 on our house before we’d even slept there!
Unwitting Speculator #2: Yeah… same here… my house is way up already, so I have a good margin of safety. And when I get married…
All (in unison): Awwww.
Renter #1: Hey, 30-year fixed, I know you’ve already made money on your house, but what do you see in the future?
30-Year Fixed: I have a response, but first I’d like to make a comment…
There are some neighborhoods that will always hold value. [muffled remarks… something about the location of the house…a leafy street…children on bikes…speed humps… shiny happy people… yada, yada…]
Renter #1 (with much enthusiasm): Au Contraire! (after all, that is THE motto of The Daily Reckoning…)
Baltimore is a case study of good neighborhoods gone bad. Look at Druid Hill… beautiful row homes. Back in the ’20s F. Scott Fitzgerald and Gertrude Stein held garden parties and entertained European royalty up there. Now look at it. Hell might offer better refuge for a family of four.
On the other hand, in the ’70s respectable folk wouldn’t let their children go down to Fell’s Point unchaperoned. It was a haven to bikers, ne’er-do-wells and urchins of the night. Today, they’re building spec homes on the water that start at a million plus…
Renter #3: Too bad the harbor smells so bad…
All (sighing): Yeah…
[Pregnant pause. A moment of quiet reflection.]
Chorus: At this point, it’s not clear what conclusion, if any, can be drawn from the play.
When will the housing bubble burst?
Is it a bubble at all?
Or… will prices keep rising for five years, handing the interest-onlys the last laugh; leaving the renters, humbled once again with egg on their faces… and feeling like chumps? Well, dear reader, this is what makes a market.
Still, the renters bumble on…
ACT III – THE INTERVENTION
Unwitting Speculator #1 (jolted with excitement turning to Renter #1): Oh, that reminds me, can I have the day off tomorrow? I’m closing on my house. [Turns to the table.] Should I wear a suit?
30-year Fixed: Nah…you don’t have to wear a suit for those yahoos.
Renter #1: Sure, you can have a day off. But I forbid you to use one of these.
[Renter #1 holds up a pen. Renter #2 and Renter #3 smile at each other.]
Renter #3 (smugly): Ahhh… No pens, no signing.
Renter #2 (smug and grinning): Yeah… no pens.
30-year Fixed (Gesticulating expansively, raises his voice): Ah, don’t listen to THEM… (mutters to himself) for crissakes.
[Check arrives. Curtain falls.]
Your playful playwrights at The Daily Reckoning
DISCLAIMER: Any and all events in this dramatic reenactment are purely non-fictional. Any resemblance to real life is intentional; not at all coincidental. Some liberty may have been taken with the facts, but we swear it was in good faith. We may have been embellished a tad for dramatic effect.