The Mortgage Motivator: "Fraud" - not harsh enough a word

The Mortgage Motivator: "Fraud" - not harsh enough a word

April 24, 2007

Perception vs. reality: 25 reasons why there is no bubbleBrian T. Larrabee, CMPSpersonal financial freedom, research, statistics
"If we worked on the assumption that what is accepted as true
really is true, then there would be little hope of advance."
-Wilbur Wright
Wilbur wasn't referring to the real estate market, yet the
concept is every bit as applicable today. The "bubble" word has
been uttered so many times by those with a pulpit that it's
considered true in the minds of the masses. Just as many still
believe that owning your home free and clear is the pinnacle of
personal financial freedom. As most of us now know, the facts can
be enlightening and tell an altogether different story.
As kids, we learn to fold paper into airplanes and delight in
watching them sail across the room. As an older fellow with a
desire to defy gravity, I learned that airplanes of the aluminum
persuasion don't really sail on the air, but rather the curvature
of the wing creates a pressure differential, and the wing is
literally sucked up into this void. As long as there is relative
wind, or the motion of air over the wing at a sufficient speed,
that wing, and therefore the plane, will fly. After earning my own
wings and accumulating hundreds of hours in the cockpit, I wanted a
little more excitement and got to spend a little time doing
aerobatics in an open-cockpit biplane and a glider over the
northern hills of Napa Valley. Yeah, I know. Why fly upside down in
one plane without a roof and another without a motor? Let's just
say that's a good question! Besides, coming from the guy who never
landed in a plane until his third flight (I jumped out to descend
by parachute the first two times), this was sedate.
Glutton for punishment that I am, I sought out this ultimate
adrenaline rush of aerobatic flight again the next year over the
cool waters of Nantucket Sound. It is funny what can go through
your mind as you hit the point near the top of a loop where you go
weightless and the blue sky and glare from the sun filling your
canopy turns into that unusual horizon where the ground is on top
and the sky is down below. For those of you who haven't been there,
absent the headache, it's not too much different than waking up
with your head hanging upside down off that beachside picnic table
after a night of overindulgence of margaritas.
What occurred to me at that precarious point was that old ground
school lesson about the curvature of wings creating lift and the
ability to fly. What made me recall this after spending all that
time upside down in a perfectly good airplane? It was the sudden
realization that the curves of my wing tops were now facing down!
So, as we're completing our crest and begin hurtling toward the
white-capped waters three thousand feet below, my grip on the stick
tightened, the blood that had momentarily pooled in my head found
its way back to my feet, I prepped my body for the tremendous G
force of pulling up at the bottom of the loop and I made a casual
mental note to ask my instructor why we weren't dead yet.
Back on terra firma with the goggles and leather helmet stowed
away, the big radial engine crackling as it cooled and my wallet
drained of cash, I posed my question about inverted wings. "That's
complicated; you might just want to do some research" is about all
that was mustered, as he motioned to saddle up his next victim
eagerly awaiting her theory-busting ride in that old Waco.
"Research," he said. Well, that rings true, whether it's the
theory of flight or learning what really makes the real estate
market tick. Be it caused by obfuscation in our news or resting
comfortably in our own ignorance, our knowledge is incomplete.
Research fills the void.
The void, created as the general media throws out hooks to grab
our attention well enough to prevent us from flipping channels
while we sit through three minutes of commercials, distorts the
truth at best and, at worst, leaves us at the controls of our own
destiny, with all of the aerodynamic security of a brick at 30,000
Confronted with a gut instinct fueled by years of participation
telling me one thing and a steadily growing prop wash of analysts,
so-called experts and probably more than a few survivors of the
"tech wreck" now seeking redemption by berating the run-up in real
estate values singing a different tune, it was time to do some real
research and to put this "bubble" theory back in the hangar.
Allow me to share just some of the things that I've learned.
1. Using national median sales prices, real estate values have
risen by about 6.6 percent since 1963. That's hardly a supersonic
2. The "bubble," as it's referred to, is a short number of years
during which values had exceeded that 6.6 percent average. The
funny thing is that for 21 years prior, the appreciation rate was
decidedly below average.
3. These last few years of above-average appreciation have done
nothing, but bring the country back to the 42-year-old trend line
after quite a few years below it.
4. Economists say that housing has outpaced the rate of wage
increase. This is true, but they're using measures not necessarily
reflective of today's society.
5. In fact, the average increase in disposable income is
approximately 6.4 percent. I'd say that's pretty close to the
average appreciation rate of 6.6 percent.
6. The housing participation rate is slightly under 70 percent.
That's a record high, and it reflects a growing demand that can
only lead to higher prices.
7. Not only low rates, but also longer loan terms and more
flexible loan options have allowed many to become new homeowners.
Most of these individuals will not go back to being renters.
8. U.S. population growth advances at close to three million
people per year. As we have an average of less than three people
residing in each housing unit, we'll continue to need more than a
million new homes per year.
9. As buildable land becomes scarcer due not only to density but
also tougher restrictions and wetlands laws, both land and existing
home prices will likely rise.
10. Interest rates rise and fall with the presence or absence of
inflationary pressure; so, too, do home prices. Yet in the case of
housing, falling rates can eclipse deflationary forces by
stimulating affordability and increasing participation and demand.
In turn, fuel prices increase.
11. Economists say houses have outpaced inflation, and that's a
recipe for a fall. I say housing is a hedge against inflation (see
prior reason).
12. Housing is one of the last great tax deductions available to
the average person.
13. I might change my mind if Mr. Shiller sells his houses, but
his wife won't let him (listen to Barry Habib and Sue Woodard's
Mortgage Market Guide conference call with Mr. Shiller).
14. Average house sizes alone are growing at better than one
percent per year. Bigger houses cost more money.
15. An increase of 6.6 percent in house prices earns you about 28
percent on your 20 percent down payment, and that's before the tax
16. Cities will always remain where they were first built, even if
their locations were selected by their proximity to navigable
waterways and prone to hurricanes, floods, volcanoes or
earthquakes. Some have even been rebuilt in the same place after
proving the probability of natural disaster very real.
17. Since the highest-paying jobs are usually in cities, you have
to live close enough to work there. Since most people want those
jobs, they will all pay more to live close enough to get there
without spending four hours in the car or on the train every
18. Don't forget supply and demand. We all need a place to live.
We don't need stocks, tulip bulbs (oft cited whipping post for
speculative fervor) or frozen orange juice futures (just a glass of
it will do). In other words, you can't compare something with
intrinsic value (basic shelter) to something with none.
19. Most houses are made of wood. It takes a long time to grow a
tree (I didn't have to do much research to figure this one out).
The components of our homes and the cost of the labor to assemble
them are at least protected by inflation. Unless our homes are
abandoned to the elements, they are quite durable.
20. At least so far, we make our own houses.
21. The cost of mortgage financing across all measured households
is only about 11 percent of disposable income. While this is
clearly skewed by older homeowners with little or no payments, it
underlines the overall degree of affordability.
22. Our population is aging. As a group, the highest percentage of
homeowners falls into the higher age brackets. In other words, the
older you are, the more likely you are to own a home, and as the
boomers age, we will have even more owners.
23. Don't forget single-person occupancy. As more people live
longer, single occupancy continues to grow, even though it might
not be financially prudent. Have you ever tried telling Grandma she
needs to leave or "shack up?" Emotional attachment and good old
stubbornness are not factors that economists usually model, but
they should.
24. Speaking of stubbornness, most would-be sellers confronted
with the realization that, if they sell, it will be for less than
they truly thought their house to be worth, will simply remove it
from the market and wait. This, of course, excludes those with no
choice, but these are the minority.
25. A house is more than just a house. To most, it is a home. It's
where we raise our families, carve our histories into door frames
and form our memories of youth, marriage, parenthood and beyond.
This emotional attachment may be of zero value to our buyers, but
since we're only selling to those that pay the value we've
perceived, it becomes real in the end.
Probably the most important theory I can conjure is regarding
the physical nature of houses themselves. Having been a builder, I
know all too well what goes into the construction of a dwelling.
Many are fond of repeating the old axiom, "A house is the largest
purchase or investment you will ever make." It's also pretty much
the largest thing you will ever buy (physically speaking, that is).
While I alluded to this in reason number 20, it's worth exploring a
little deeper. While economists harp on the fact that home prices
have risen in excess of inflation, they fail to mention that many
other commodities of daily life and work have not. In fact, some
have fallen. Computers, long distance telephone service,
televisions and just about anything electronic (save for the first
year it's available) have gone down in price. Even new vehicle
prices have actually dropped in the last 10 years. Why? Well, I
think we all know the answer to thatmass production,
computer-fueled efficiency, robotics, outsourcing, global trade and
billions of hungry workers in China and other developing nations.
Inflation, or specifically inflation as measured by the Consumer
Price Index, is made up of many things. As some prices fall, we
have more of our income available to spend on the things that we
want and need, like housing.
Further to my theory, outside of foreign investment in our
markets, I just don't see the construction of our homes being
outsourced or becoming a volume-priced consumer staple sold at
Wal-Mart. Electronics can be miniaturized, but that's not such a
hot idea for houses. It takes sweat, blood, manpower, fuel and ton
after ton of cement, lumber, sheetrock, masonry, stone, glass,
nails and asphalt to build a house. Though I did see a few people
once using old shipping containers to build apartments, I don't
think it's a trend that'll catch on too quickly in most
neighborhoods. Barring the sudden re-popularization of teepees or
everyone living out of their Winnebago suddenly becoming chic, I
trust that real estate values will continue their historically
evidenced ascent at a pace reflective of our ability to afford
As we've moved from an agrarian to an industrialized nation and
now another chapter unfolds as our society changes again to one
fueled by intellectual capital and the spoils fall to those most
willing to embrace it, our markets will reflect these changes. As
modern medicine prolongs the lives of our citizens, as immigration
bestows new opportunities to millions who can now realize a piece
of the dream and as new generations inherit the accumulated wealth
of their families, the home will remain the center of it all.
So, despite what the media may tell us and despite what Wilbur
was told, to those who warn of the impending crash, I say, "Sure,
the possibility exists." I also happen to know that you can turn
some theories (or even the wing of a plane) upside down and they'll
still fly.
You can be just anyone in the crowd standing in the dunes at
Kitty Hawk, knowing that you're going to see something magical or a
sensational crash. Perhaps your expectations are for a short
departure from the ground, followed by a soft landing. Or, you
could be the guy who senses the real opportunity at hand and buys
up all the land around that little strip of once-desolate land
that's now a national treasure. The choice is yours.
Brian T. Larrabee, CMPS is a 27-year veteran of the real
estate and banking industries. He is also the founder of Estate of Mind Inc., a
publisher of educational and promotional products for mortgage and
real estate professionals. He can be reached at