The Flaw

housing_bustThe year was 1999 and I killed some time waiting for a flight at the Manchester, NH airport by having a drink at the bar. With the news of yet another day of unprecedented stock market gains playing on the TV in the background, a lone traveler sitting next to me shouted out, “yeah baby, keep it going”. I asked him, “so you had a good day?”

He proceeded to tell me that he had become rich playing the stock market. That with only a High School education, he couldn’t go wrong with his stock picks, especially Initial Public Offerings (IPO’s). He said that regardless of the industry, he always made good, quick money with an IPO.

As I returned to Richmond that night, I went to see a High School football game. Sitting in the stands with a friend, I told him about my experience at the airport and asked what he thought of the market. He too had been caught up in the day trading mania and set aside $40,000 to play with. He spoke like it was “play” money, taking risks while doing little research since the stock market trends had been so consistently good.

The same belief of perpetual upward trends could be said of the real estate market through the 80’s and the 90’s. As I’ve mentioned before, I bought and sold numerous homes during that time period, and it always seemed like a sure bet that real estate prices would rise.

This type of thinking was so wide spread back then, that a sense of hysteria set in. That if you weren’t in the stock or real estate market, well then,  you were a fool!

This hysteria seemed to go on steroids in the early 2000’s especially when the lending institutions lessened the credit rules that had been in existence for a hundred years. Need a loan for a home? No problem; you could borrow up to 105% of the purchase price by merely stating your income!

As the movie, The Flaw points out, the big banks believed the real estate market would continue to rise. They looked the other way when the price of homes literally double in the early 2000’s which added on more debt to people especially at the bottom of the wage scale. This added fuel to an already growing gap of wage inequality in America.

We know the next chapter. The housing bubble, like the stock market, burst in 2006 and stayed in a downward slide for the next six years. Millions of homes went into foreclosure as the debt payments sometimes exceeded take home pay.

Unfortunately, many people learned the hard way that there is no Get-Rich-Quick formula. That taking risks based on what everyone else was doing, and without adequate research, is nonsense.


John Marklin

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