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Bubbles Are For Bathtubs

The Real Estate Boom

In 2005, Jamie Westenhiser, Playboy Enterprises Inc.'s Playmate of the Month for May of that year, announced that her disrobing days were over. With housing prices near her home in Fort Lauderdale, Florida, up 105 percent in the previous five years, the then 23-year-old model told the magazine she was quitting the skin game for a career in real estate. The Playboy Bunny swapped a profession specializing in artificially inflated assets for a career focused on, well, artificially inflated assets. Westenhiser made her move just as U.S. housing reached its least affordable level in the five years since the National association of Realtors began tracking median home prices against incomes.

The seeds of the global credit crunch were sowed in the housing market. It was fertile ground, nourished by a booming economy and watered by a misguided belief that the good times would never end and housing prices would never fall. all of the credit crunch villains played a role in inflating the real estate bubble, including ordinary people borrowing beyond their means to buy their dream properties or simply gamble for profit, market regulators averting their eyes from the growing pile of unsafe mortgages, and investment bankers who were able to weave ordinary home loans into complex financial products to be bought and sold all around the world.

Suspending Disbelief

Houses and apartments, typically slow to build, sometimes hard to sell, and easily the most expensive purchases most people ever make, were once considered a long-term commitment. Buyers needed verifiable incomes and good credit scores to get mortgages. In this market, however, it became akin to sacrilege to admit that some consumers couldn't handle a mortgage. Banks loved the possibility of writing and packaging more mortgages--and earning the attendant fees. Investors were eager to buy those mortgages. Politicians loved the idea of poorer constituents getting a foothold in the housing market, making for more stable communities--and potentially more winnable votes.

The housing market became a Ponzi scheme, where the cash from the new entrants was passed up the pyramid to give the illusion of rising profits. That worked when prices were rising, but proved disastrous when values started to subside, a slide that triggered the credit crunch. Banks lent money against a backdrop of rising housing values, so people felt as if they were better off. In truth, though, the churning market created little real wealth. The foundations of the housing boom crumbled easily because thy were made of borrowed money.

To maintain the charade, the market needed a strong supply of new prospective hownowners--ideally, ones who would suspend any disbelief in forever-increasing home values. In the 1980's, about 64 percent of Americans owned their own homes, according to figures collected by the U.S. Census Bureau. As mortgages became more freely available, that percentage jumped to about 69 percent by the middle of 2004--a large jump, given how stable homeownership figures had been for decades, and one that probably incorporated the most marginally qualified buyers. It stuck there for the following three years, them slipped to 68 percent in 2007 and 2008 as the housing market collapsed.

Many of those latecomers would never have qualified for a mortgage under normal circumstances. But because the people at every link in the housing chain had a stake in keeping the music playing as long as possible, the hindmost were welcomed into the homeowning fold, where membership qualifications grew more and more lax. These changing credit standards formed the "credit" side of the credit crunch.

Bubbles Are For Bathtubs

The financial bubble that grew up around the U.S. housing market also needed experienced buyers to suspend their powers of reason and adopt the belief that housing prices would continue ever upward. "Bubbles are for bathtubs," was the marketing message at http://www.condoflip.com, a Web site exhorting Americans to jump on the get-rich bandwagon by "flipping" properties. Some bought and sold existing home; others went so far as buying developer-planned condominiums, then selling them to the next speculator, at a profit, before construction crews even broke ground.

Excerpt from Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable by Mark Gilbert

Mark Gilbert, bureau chief for Bloomberg News in London, has been with Bloomberg News since 1991 and has written a regular column on Global financial issues since 1998. He spent more than eighteen months warning about the impending credit crisis, later helping readers disentangle its consequences. He frequently appears as a commentator on Bloomberg Television. Gilbert lives in London, England.

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