The year of the Ponzi…. I think Karen Finerman of CNBC's Fast Money said it best when the news broke in regards to Bernard Madoff’s $50 billion Wall Street Ponzi scheme, she stated that” if there was a year to admit you where running a Ponzi scheme 2008 was it.” Basically a Ponzi scheme, is a scam where the people that run them and get in at the beginning, make money, by recruiting new money from new people until eventually it folds like a house cards because you cannot recruit any more people with money.
Sound familiar? How about the Real Estate Market? Stock Market? I am sure no one will ever be arrested and have to do 20 years at the country club in these conspiracies of the willing, but there have been plenty of Ponzi’s out there in our national markets.
Over the last last decade, I could not help but think how much the residential real estate market resembled a Ponzi scheme. People that bought in early did very well, and as long as they could keep recruiting people in with new money everything would be fine. And just like many Ponzi’s, it failed when you could no longer recruit new people. In many ways this is much more tragic then Madoff’s Ponzi.
This is why the Obama administration is certain to create some type of homeownership stimulus at some point to get more people buying homes. It would not be the first time, and there are a lot of ideas floating around already, such as big rebates, guaranteed values in the home and extremely low interest rates. Stabilizing this market will not happen overnight, but it is the key to stabilizing the banking system and the economy.
I just hope any type of stimulus is packaged with major reforms for of course banks/mortgage brokers and real estate agents. I guess it is pretty obvious that mortgage brokers should actually confirm that lenders have income, a job or an asset. Also, real estate agents should not be saying things like great investment and tax deduction without any disclaimer to their level of expertise in these matters.
I have been watching this market very closely since 2005 and can’t help but think that the bottom is about two years away. The best time to buy will be in 2011. A residential real estate market revival will require two major pieces of legislation, a real estate buying stimulus that I mentioned above that will be pretty historic in nature and an immigration bill. This is in addition to a fear of major-inflation at levels around 6% - 7 %, will convert the bubble watchers into real estate buyers.
Regardless, I hope people will think a lot more before they buy real estate or any other investments. Many people are pointing to sub-prime borrowers saying that they were buying homes they could not afford as the biggest culprits in this mess. There were a lot of people with good means trying to flip three or four homes at once and others having more vacation homes than vacations!
Bob O’Brien
Sr. Instructor
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