The California Social Contract

Do you remember in Houses Should Not Be a Commodity, there was a long discussion on the stages of grief as they relate to the housing market? The market is shifting from denial into bargaining.


Jim Cramer has made news lately with his antics. The links below are to videos where he has demonstrated for us the following progression as it relates to the chart above:

Denial — On housing, November 2006

Anger — He is always angry. His show is Mad Money

Depression and Detachment — Plow under the Inland Empire

Dialogue and Bargaining — Lobbying for a Rate Cut

When you think about it, isn’t the whole discussion about a bail-out bargaining? We all know the government is not going to save the millions of overextended homeowners. They couldn’t if they wanted to. Isn’t this one last gasp before the market capitulates? I think so.

Empathy and compassion are at the core of my spiritual life. I feel the pain of all the effed borrowers (FBs) out there. To prove it, I want to share with you my meditation on the emotional bargaining of FBs everywhere:

The FB Plea…

You fence-sitters are failing to fulfill your part of the California Social Contract. Your failure to continue buying homes is disrupting the social order, and it is causing those of us who bought before you psychological, emotional and financial damage. It is time for you to get off the fence and buy — NOW!!!

In any social contract, you give up something personally for the greater good. When those of us who bought before you purchased our homes, we had to commit unrealistic percentages of our income to housing, lie on mortgage applications, and take out financing on unstable mortgage terms in order to do our part for the continuing social good. We made these sacrifices willingly because the benefits of maintaining the social contract are worth the price we paid. Look what those who bought before us received in return:

  1. Dramatic increases in wealth through home equity. I think we can all agree this is desirable. You want to be rich, don’t you?
  2. The ability to spend more than what is earned through productive activities like work. Think of all the BMWs, Mercedes, vacations to Maui, Coach bags, designer jeans, Rolex watches and other items purchased with home equity lines of credit. Don’t you want to double your spending power?
  3. The ability to buy furniture and home improvements without saving or spending income. Your house should be a self-sustaining asset which provides the ability to maintain itself with perpetual appreciation. Who wouldn’t want that?

We provided all of this to the buyers who came before us, and all we ask is that you do the same for us. Isn’t this a fair bargain? Don’t you want the same for yourself? Won’t the next generation of buyers we willing to do the same?

Some have argued it is our fault that the social contract is falling apart. If we recent homebuyers had simply made our payments, the contract would not have been broken. This is rubbish. The lenders failed us. They knew we couldn’t make those payments when we took out the loans. They knew we were lying on our loan applications. They knew they were going to have to provide opportunities for serial refinancing of ever increasing amounts of debt. They failed us. They are the ones who broke the social contract, not us.

The tightening of credit just means you will have to make more significant sacrifices to keep the social contract. You may need to borrow money from family members or solicit larger gifts. You may need to become more creative in your attempts to inflate your income or assets. All we had to do was sign some fraudulent paperwork, but you may have to forge some documents or buy a seasoned credit line or find a hard-money lender who doesn’t record the debt (loan sharks.) It is going to be tough, but look at the benefits listed above. Isn’t it worth the sacrifice?

It is time for you to buy now. Trees really can grow to the sky; prices really can go up forever — if you hold up your end of the California Social Contract. To paraphrase Winston Churchill,

Let us therefore brace ourselves to our duties, and so bear ourselves that if the {California Social Contract} last for a thousand years, men will still say, ‘This was their finest hour.’

This is your chance to stand up for what is right and perpetuate a system that is beneficial to our society. History will remember what you do. Will you be the generation that lived up to its duties, or will this be the end of the world as we know it?

You decide.