About a year ago I wrote about the coming so-called Real Estate Burbuja in Spain. What have I learned since then? Did any of what I said hold up? Well, the main point of my post then was … it’s always something you didn’t expect – that’s what jumps up and bites you in the ass!
The real estate market is cyclical. People get greedy and think it’s never going to end, so they jump in expecting to make easy money. This always happens. Warren Buffet says something like, “Be cautious when everyone else is greedy, and be greedy when everyone else is cautious.” This works for real estate as well as for stocks. I knew prices were going to fall, but I thought (and still think) that if you buy real estate correctly, and can afford it, and can hold on to it - it will continue to rise in the long run, and out grow any short-term losses.
But I will tell you what I did not expect. And honestly, I still really can’t quite wrap my mind around it. It’s this “sub-prime” business. I thought bankers were not complete morons, and maybe they are not. I would say, however, that whoever gets stuck with the bill for the mortgages people can’t pay - might be the morons. I’m just afraid it will be the taxpayers – in the US and Spain.
So what happened (as far as I can tell)? I think two main scenarios occurred to create the sub-prime problems in the U.S. (By the way, “sub-prime” just means lending money to people who really couldn’t afford it in the first place).
1) Greedy loan sellers lent other people’s money to homebuyers just to get the commissions. They came up with shaky, creative ways to sell people loans – loans the people could not really afford. They got their commissions and split. Still not sure why the people with the money would give it to these hucksters to loan out in the first place.
2) Greedy banks or loan sellers gave out a bunch of bad loans then sold them in a bundle, to other investment banks (like Bear Stearns). Bear Stearns thought the loans were OK and that they would be getting a bunch of interest off of them. All the loans were crap though.
Blame the Americans
There’s a lot of talk in the Spanish press about this and how all Spain’s problems can be blamed on our situation. It seems to me that banks and people are pretty much the same all over. Our mistakes will be their mistakes. In Spain, they have sub-prime also. They just don’t call it that. Spain’s “sub-prime” were the very low interest, variable-rate loans commonly available during the boom. Buyers qualified for these low introductory rates and now can’t afford the payments after the Euribor rose – so they don’t pay. Especially since their piso is not worth so much anymore. That’s sub-prime.
Remember that variable-rate interest loans are the majority in Spain. In the U.S., they are not. I have not figured out why fixed-rate interest loans are not commonly available in Spain, other than the banks can screw you better with variable -rate loans.
I don’t pretend to fully understand the whole situation. And I’m sure the people writing about it in the press don’t understand it either. They just scream and yell. I do know that if you stick to the fundamentals and have some common sense – you will survive the horrible “Bubble”.
Coming next, Rules to Survive the Bubble.
