Sometimes, something is so glaringly obvious that you ignore it. It's right in your face, you know there is something wrong, but you're distracted by other wilder, crazier things.
I've felt that we were building too many houses in Bend for several years; actually, I think I was saying that even before the actual bubble. My concern was that Bend didn't have an underlying industry, or economic base, to justify all the housing. I didn't think minimum wage tourism jobs could pay for them, and there were only so many amenity rich transplants we were likely to convince to move here. I'm not even sure I was all that conscious that it was a national problem, I just could see what was obvious here in Bend.
I never felt that retired people were big spenders. The number of stores in Bend seems wildly excessive. It seemed that an awful lot of the newcomers were involved in real estate or building or support industries. More and more, it appeared to me that growth was the industry of Bend, and the industry of Bend was growth, a big Ouroboros Worm eating it's tail.
I wasn't really very aware of the credit/liquidity problem until it burst. I don't remember too many people talking about it, or reading very many stories about it.
In hindsight, that too was obvious. I'd heard plenty of troubling stories over the years about people borrowing money that I didn't think they could afford to pay back. But subprime and Alt loans and other guaranteed to make you 'house poor' schemes have been around for years.
Was it the cause or the effect of too many houses? Whatever, it was the precipitating factor in bursting the bubble. The curtain was drawn back, and the wizard behind the screen was naked as a jaybird.
I've begun to see the whole housing thing as a true pyramid scheme.
At the top, the fewest and the biggest, and probably the ones who scammed most of the money, were the big financial firms; the Bear, Stearns, the Lehman's. Right underneath of them, a bit more numerous, were the big banks. Both of these found loopholes in the relaxed regulations to bundle problematic schemes into 'investments.'
Next level under, more numerous, were the national builders, the national chains, and the big box developments. Again, I've felt too many commercial buildings were being built, especially locally. All done, in my opinion, in money borrowed from the future. A vast pool of liquidity that seemed 'free'; but will have to be paid.
Just below them, the regional banks, builders, and mortgage companies; the wannabes and the followers.
Under them, in much bigger numbers, a crazy number of local mortgage and banks and other financial services. And an even crazier number of local builders and construction firms.
Working for them, a vast pool of real estate agents, and construction workers, and mortgage agents, and clerks working at stores supplying the bubble, and so on.
And finally, in at the base, the home buyers themselves. Prime, alt-loans, and subprime.
In most pyramid schemes, the top walks off with all the money. Whats unusual this time is that the problem first appeared at the top. The level of greed and graft and stupidity was so massive, that once we saw the wizard's big, red, hairy butt, we wanted our money back. After the collapse of Bear, Stearns, the government rushed to reassure us that they are buying the other financial services some fine pants. Don't worry, we'll take care of it!
But, as usual in a pyramid scheme, the biggest number at the bottom are bearing most of the brunt.
Do you see the part of the pyramid that hasn't really been talked about much?
Except for a few high profile national builders, it seems to me that most of the developers and big builders, both regionally and locally, haven't really been punished yet. Even when a company seems to run into problems, someone else comes along and bails them out. Randy Sebastian is given another lease on life, albeit with his nuts firmly clamped.
It has been commented in passing, that building just seems to keep going on, despite the glut of housing and the lending problems.
Yesterday, the Wall Street Journal had an article that partly explained what's been going on:
In "Real-Estate Woes of Banks Mount," Michael Corkery, Jonathan Karp and Damian Paletta of the Wall Street Journal: (Italics are mine, to highlight the role of the developers.)
"Federal regulators warned Thursday that banking-industry turmoil would continue as financial institutions come to terms with piles of bad loans they made to finance the construction of homes and condominiums.
"Until now, most of the damage to banks from the housing crisis has come from homeowners defaulting on their mortgages. But amid a dismal spring sales season for new homes, loans to home and condo builders are looking increasingly shaky..."
"...banks that aren't diversified, or those with high exposures to residential construction and development, are of particular concern..."
"Home builders are falling behind on loan payments, and the value of the land and housing developments that serve as loan collateral is plummeting."
""We believe this period of procrastination is nearly over," says Ivy Zelman, chief executive of Zelman & Associates.
"The prospect of a new wave of losses worries federal regulators, given the large proportion of loans to housing developers held by many banks and thrifts. The problems are worse at small banks that can't easily absorb losses, and at banks with big exposure in states hit hard by the housing crisis..."
'Real-estate lenders had been hoping for a decent spring sales season for new homes, which would have helped builders stay current on their loans. But the selling season has been a bust.'
"..."Finally the banks are capitulating and saying, 'Let's mark to market and flush this all out.' The market is going to get worse. We don't want to hold on to this stuff."
For me, this is the final piece of the puzzle. It both explains why frenzied building continues by developers, and the response of the banks. It finally let me see the whole thing as the pyramid scheme I detailed above. It also appears to me that problems are starting to ricochet through the different levels -- the government steps in to try to firm up one problem, but it breaks out on another level and so on. Which mean, it probably can't be controlled.
I'd thought most of the bad news would be put on the back burner during the spring and summer, and the accounting would take place in the fall. Now, I'm wondering if even locally, they'll be able to hold off taking the developers out of play.
If you don't mind, I'd like to repeat one of the above quoted paragraphs, in Capital Letters and Italicized.
"REAL-ESTATE LENDERS HAD BEEN HOPING FOR A DECENT SPRING SALES SEASON FOR NEW HOMES, WHICH WOULD HAVE HELPED BUILDERS STAY CURRENT ON THEIR LOANS. BUT THE SELLING SEASON HAS BEEN A BUST."
5 days ago