Jul062015

Success of novices is sign of a housing bubble

When those without training, knowledge, or experience succeed wildly and want to teach others, it’s a sign of a financial mania.

anyone_can_do_it_realtorPeople make profitable investments every day. Sometimes good fortune is the result of careful analysis and a disciplined approach; sometimes good fortune is a result of dumb luck. Unfortunately, most people can’t tell the difference between the two. For example, profiting from adjustable-rate mortgages is lucky, not wise, yet those that benefited from taking this foolish risk are keen to convince the rest of us their financial acumen created their good fortune.

During a financial mania, everyone who participates makes a fortune, and everyone believes their good fortune is a direct result of their genius, generally manifesting as buying a rapidly appreciating asset. The most foolish investment decision made by novices is to succumb to their recency bias and buy a rapidly appreciating asset on the assumption the rapid appreciation will continue forever. The most conservative are the ones who wait until the trend of rapid appreciation is firmly established, thereby becoming the late buyers who overpay the most and get burned the worst.

One strong indicator of a financial mania is that ignorant novices start expounding their expertise. The classic example is the apocryphal story of Joseph Kennedy who recognized it was time to sell his stocks in 1929 when he received a useful stock tip from his shoeshine boy. During the housing bubble, the ignorant novice who signaled the top was a young man named Casey Serin.casey-serin

Casey Serin

Casey Konstantin Serin (born September 10, 1982) is an Uzbek-born American blogger and a former real estate investor. In … his early twenties, Serin decided to quit working full-time in order to pursue a career in house flipping as a means of earning an income and building wealth.

People can earn an income and build wealth with real estate, but what Casey was doing was operating a personal Ponzi scheme where he intended to “earn” income through serial refinancing his rapidly appreciating assets.

Between October 2005 and May 2006, Serin purchased eight single-family homes using stated income loans. These loans required no documentation of income, nor any down payments. Before quitting his web design position in January 2006, Serin claimed an over-inflated income (roughly five times his actual pay) on his loan applications, reasoning that many other borrowers were using similar strategies to obtain mortgages for which they would not otherwise qualify. He continued to claim the same income on loan applications completed after he had quit his job.

This says more about the foolishness of lenders at the time than it does about Casey Serin. Yes, Casey had no ethics and he gamed the system, but he played the game lenders allowed him to play — encouraged him to play. Lenders are more culpable than borrowers in the mortgage mess.

Serin received cash back at closing on six of the properties, sometimes exceeding California’s legal maximum of three percent of the selling price. … The largest amount of cash Serin received for a transaction was $50,000, and that the money was paid either to the seller or a third-party company (which the contributor alleges was bogus), and then returned to Serin after closing. …

free-money

Despite already being deeply in debt, in late 2006, Serin borrowed $16,000 to purchase a week-long real estate seminar course purporting to teach “creative financing” at Nouveau Riche University (NRU) in Phoenix.

Borrowing money to attend a creative financing seminar? Based on his behavior to that point, he could probably teach the class.its_free_money

Months later, as the United States housing bubble began to rapidly deflate, Serin became unable to pay the mortgages or sell the properties; at one point, he estimated that he was approximately $2.2 million in debt, with a net worth around negative $600,000. Serin’s house buying spree ultimately ended when a lender rejected a loan application for what would have been his ninth property, after discovering his blog. … Public records confirm that Serin did purchase the properties in question and did subsequently default on most of the mortgages.

In September 2006, Serin started the blog IamFacingForeclosure describing his situation, with the idea of both soliciting advice and warning others how to avoid the mistakes he had made. …

During the ensuing 9 months that the blog was updated, Serin generally let his problems stagnate—urgent mail went unopened, the houses went into foreclosure one by one, and Serin did not actively look for work. The overall tone of the blog’s comments gradually went from encouraging Serin to openly deriding him for his inaction, his apparent nonchalant attitude towards his financial issues, and his role in the then-emerging subprime mortgage crisis. … Many commenters stated that they were attracted to the increasingly “soap opera”-like nature of Serin’s story, and the blog was featured on a number of sites devoted to so-called “trainwreck watching.”

Casey’s blog was very entertaining, and together with Housing Panic, I Am Facing Foreclosure was one of the best blogs to capture the zeitgeist of the housing bubble.

Whenever Casin Serins start cropping up, it’s a sure sign of a real estate bubble.Irvine_World_News_Cover_clean

Finally, property bubble proof

The Sydney and Melbourne property bubble is real. And Stephanie Brennan, full of youthful hope and hubris, proves it.

by John Addis 24 Jun 2015

Every bubble has its naysayers and disbelievers. Usually, no one pays them much attention, at least not until the bubble bursts and the media are casting around for someone to explain what the hell just happened.

This time though, people calling ‘time’ on the stupendous increase in property prices in Sydney and Melbourne are being handed media megaphones with a brief to be as alarmist as they like.

Take Treasury Secretary John Fraser, who last month said Sydney was ‘unequivocally’ in a bubble. Unless they’re close to retirement and have a bonnet full of bees, econocrats don’t use language like that.

Is this bubble of so much concern to policymakers that they have to abandon their usual tempered, cautious, language so no property buyer has the excuse that they weren’t warned?

baghdad_bobIt’s hard to imagine this kind of behavior among government officials. In the United States, denying the housing bubble was a consistent characteristic of everyone in the government and federal reserve — and, of course, realtors.

The oddness was turned up to 11 last week when buyers’ advocate David Morrell was quoted in the Financial Review: ‘Are we in a bubble? Of course we are. It just depends who is caught with the parcel.’

Morrell has just broken the first rule of his profession: if you work in real estate, talk prices up, not down. In fact, so common is the idea of an Australian property bubble it even has its own Wikipedia page.

All of this makes me wonder; if one of the preconditions of a bubble is the widespread acceptance of its “unbubbleness”, then this time really is different. Maybe Sydney and Melbourne property isn’t in a bubble after all?

Maybe all those arguments about land shortages and growing population do explain everything.

It’s different this time… not.bullish on real estate

Then up pops 24-year old Stephanie Brennan, one of Australia’s youngest property tycoons according to news.com.au.

Stephanie owns six properties worth more than $2.3m. Aiming to retire by 30, Ms Brennan is a uni dropout who’s been investing for three years, proving that it is “still possible to buy property in Sydney.”

Well, of course it’s still possible but that doesn’t make it sensible. Wasn’t it this attitude that made the GFC possible? Easy money and a false premise built on the notion that prices always, always go up (which is true if you’re 24)?

But it gets better. Stephanie thinks ‘there should be a lot more guidance’ in property investing, which is why she’s launched her own business ‘to help others do what she’s done, offering everything from financial planning to accounting and mortgages.’

Surely this is it, the final ringing of the warning bell?

It certainly appears to be.bagholder

If, after three short years of ‘success’, a 24-year old is in a position to advise retirees on where to invest their money and the mainstream media is breathlessly labeling them a ‘tycoon’, talking up their new business, this has to be the top.

The Sydney and Melbourne property bubble is real. And Stephanie Brennan, full of youthful hope and hubris, proves it.

When it all goes pear-shaped don’t worry about Stephanie, she’ll be fine.

Having attended Pymble Ladies’ College and won a position as a former advisor to Bronwyn Bishop at the age of 20, her well-to-do parents are a great insurance policy.

But for stretched property buyers without those advantages, the best thing to do is take David Morrell’s advice and make sure you’re not left holding the parcel.

This may not be the final sign of an Australian property bubble. When the Chinese start buying up Australian real estate, that will be the final sign.

China-Real-Estate

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