Foreclosure Avoidance: A Society that is Psychologically Bent On Avoiding the Brutal Facts.

Most will agree that as a society, we cannot spend our way into prosperity. In fact, many even the most ardent bulls will acknowledge that we have some serious issues to address in our current economy. From preliminary reports, this rate freeze will have a very minimal impact on the overall housing market. Keep in mind that we have yet to see the plan in action since the first rate resets to take effect will not occur until 1/1/2008. The proposal at best is an avenue for a cathartic release from the housing doldrums and gives those in the industry a respite to scream “let us gasp for air!” It seems to have worked. Housing related stocks are up and with the prospect of further rate cuts, all seems well until you start facing the brutal reality of what is occurring. Jim Collins in his book Good to Great examines the successful traits of prosperous companies. His focus wasn’t on high flying companies that made a torrent of money and suddenly crashed. He looked at the attributes of sustainable and successful companies. He offers various characteristics of these companies such as choosing the right people from the beginning, focusing on your core strengths, and also having the ability to confront the brutal facts. The last point seems rather harsh and down right pessimistic. Yet the essence of facing the brutal facts is optimistic because you cannot move on to greater and better things until you first address the underlying issues. In psychology 101 we learn that a prerequisite to having a healthy mental state is being able to confront our demons not with fear but with courage. Once we face up to what is at the root of the problem we can start to progress and live a healthier life. So what does this have to do with the mortgage crises? It actually has a lot to do with it. We currently live in a society that is repressed on economic issues. The impending credit crises instead of being attacked at the root is being prescribed a valium to numb the current pain. Even the term “rate freeze” gives us the perception that all is well for the moment and we’ll deal with the problem at a later date. Yet this perception circumvents the true culprit and that is we are in a historical credit bubble that needs a severe correction. As a society we have not come to terms that without credit, we have a very hard time functioning. That is why even the mere hint of a rate cut makes the financial markets slap happy because it postpones the inevitable for one more day. But is this really a healthy long term approach? A Culture of Avoidance This isn’t only seen in the economics of our consumerist society but also the psychology of other parts of our nation. Think of the avoidance of old age. Plastic surgery and cosmetics play into this desire of the forever young and give the perception that the fountain of youth has been discovered. But again, how appropriate to have plastic cover up the real you. Is this not what is occurring by funneling credit into a market that clearly needs a massive 90210 makeover? There is no drug or surgery that is going to make this market look beautiful. Think of it as a Hollywood wild west stage. All looks real and strong but when you walk behind the saloon, you realize it is held up by a two-by-four. Take a look at the public debt: Follow this by taking a look at mortgage debt: Mortgage debt is at a whopping $13.3 trillion. Couple this with stagnant wages and you realize that people are subsidizing their current lifestyle via credit. Delaying the Inevitable As I’ve been reporting at least here in Southern California , short sales have been increasing for the past 22 consecutive weeks . We are now over 12,000 short sales in the Southern California area and this doesn’t show signs of stopping. There was an interesting note that inventory did fall a bit, but looking at actual sales numbers we realize that people are simply pulling their homes off the market. Is this not a way of avoiding the main issue? There was a case on the A&E show Intervention of this woman who was $130,000 in credit card debt and had filed bankruptcy two times. We all realize that this person has some serious issues and the show of course brought this to light. Yet I am astounded that no blame was being assigned to the credit card companies. This is a person that has already demonstrated financial imprudence with not only one bankruptcy, but two and she was still able to spend. Does the dealer not have some sort of responsibility? It is a co-dependent relationship and many in our society seem so addicted to this world view of credit, that the thought of delayed gratification is a foreign concept. This imbalance is clearly seen when we look at our trade deficit: Just to offer you a direct example, in the month of October we had 323,131 20-foot containers coming into the port of Long Beach and 144,839 shipping out. A large potion of the items being shipped out are raw materials while we are bringing in boat loads of manufactured goods. Clearly this will not go on forever and these trade deficits will need to be faced. The argument may be that we are wealthier than we were in the past but more and more of disposable income is going to servicing the debt. Broken Window Theory of Mortgages Some of you are already familiar with the broken window theory. Here’s a good explanation of the theory : “Consider a building with a few broken windows. If the windows are not repaired, the tendency is for vandals to break a few more windows. Eventually, they may even break into the building, and if it’s unoccupied, perhaps become squatters or light fires inside. Or consider a sidewalk. Some litter accumulates. Soon, more litter accumulates. Eventually, people even start leaving bags of trash from take-out restaurants there or breaking into cars.” How does this apply to the mortgage and credit crises we are facing? It won’t explain the economic reason in numbers but will help to paint the picture of the psychology of what got us to where we are. The problem should have been addressed when a few “broken windows” were appearing in the mortgage industry. The first stated income loans. The early stages of fraud. Rampant speculation. An industry with no barriers to entry. Wall Street greed. These things didn’t appear with the current market but were exacerbated by the credit addiction mentality. Think of superstars who crash and burn with their addictions. When you have money, it magnifies your good attributes (donating to worldly causes) or highlights your demons (drugs and partying every night). Think of the broken window theory and why it occurs. You see someone driving a leased BMW, taking on a $500,000 mortgage, and having 10 different department store credit cards. This is the rule rather than the exception in your neighborhood. So instead of litter, you can interchange easy credit. It is easier to dive into debt when those around you follow suit. This is an observable phenomenon in sociology and goes back to the 1920s with “keeping up with the Joneses.” We can even go further back with the tulip bubble and South Sea Bubble so this is something that spans over time and is inherent in human nature. Now that the reality needs to be faced, instead of tightening up our belts as a society we are simply lowering the credit bar and trying to run on credit fumes. I’m not sure what will happen in an election year but the real solutions exists in getting our financial house in order, for example with cram downs and stopping the credit addiction cold turkey. Isn’t it ironic that the perpetrators of the housing bubble are the same one’s coming up with solutions? This is like asking a drug dealer what is the best way for a person to recover from an addiction. Politics isn’t about what makes the most economic sense over the long run but politics is the art of the possible.   Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information Share This