We were jackasses when we bought those $250,000 condos

The magazine Scientific American offers up mass psychology to explain the housing bubble. It seems we were overcome by irrational "animal spirits" when we assumed a $165,000 house was worth $289,000:

Animal spirits—the gut feeling that, yes, this is the time to buy a house or that sleeper stock—drive people to overconfidence and rash decision making during a boom. These feelings can quickly transmute into panic as anxiety rises and the market heads in the other direction.

Animal spirits propelled Internet stocks to indefensible heights during the dot-com boom and drove their values earthward just a few years later. They were present again when reckless lenders took advantage of low-interest rates to proffer adjustable-rate mortgages on risky, subprime borrowers. A phenomenon like money illusion prevailed: the borrowers of these mortgages failed to calculate what would happen if interest rates rose, which is exactly what happened during the middle of the decade, causing massive numbers of foreclosures and defaults.

I think I speak for most Floridians who bought during the housing boom: Hee Haw.

Comments

[Paradigm Shift]

"Stupid is as stupid does"
- Forrest Gump

[Tino]

What is even more disturbing after the fact is the almost-universal response by homeowners and politicians that the interest rate triggers set up in these mortgages were "unexpected" and "predatory".

It shows the abysmal level of finacial literacy of America when people can sign a 1% teaser rate on a mortgage and then be shocked when it adjusts upward to the market rate.

Perhaps these people shouldn't be homeowners in the first place -- may I recommend a nice Nigerian prince to mail their money to instead?

[James Thorner]

Many people taking 1 percent teasers WERE misled. They were told by their brokers that when the rates reset, they could always refinance or cash out all that great equity they'd have accumulated. I remember cajoling acquaintances to take a 5.8 percent 30-year fixed instead of a 1 percent teaser, but just couldn't bring them around to my point of view. The "devil" whispering in their ears - in some cases stupid brokers - was telling them they could make a killing paying minimum interest.

[Grant]

Financing was only part of the brain-cloud that predominated during the boom years. Assuming that real estate prices would rise forever, that Florida streets were paved with Gold and immune to changes in demography, and ignorance of the peaks and valleys in the business cycle were all common themes. The mainstream press, analysts, and the like never really questioned these things as abnormal. So you had otherise very smart people falling into the trap of buying properties that would end up losing as much as 60% of their value. Can you really blame them? The group-think of the time certainly supported their decision.

[Grant]

I remember seeing a huge Wachovia sign on I-275 that said "The right mortgage can get you more home". That was in 2007....

[Fuzzy Bear]

"I think I speak for most Floridians who bought during the housing boom: Hee Haw."

The Banking industry, Wall Street and the RE business sectors have been duping the unsuspecting consumer for some time.

A known factor is that most people are too busy in their careers and do not have the time or forget to do their due diligence through research and verification and thus fall into the consumer trap.

The trap is the consumers rely upon the special interest groups who come across as experts to provide the correct information for the person to make an informed decision. The common mistake by the consumer is not doing the research and verification to assure it is not hype or bubble forming designed to line the pockets of those involved.

[Tino]

RE/MAX has been playing commercials with the tagline "Now's a GREAT time to buy a house" continuously for the past five years.

Um, ok.