Zero Sum Real Estate

Back in the late 90’s and early 2000 the rage was making a quick buck in the stock market. You could throw a dart at a moving stock ticker and still make money. Authors, talk show hosts, and other ‘experts’ abounded in their availability and willingness to share their winning methods. Day trading became the new buzzword, as a new breed of its constituents threw caution to the wind and staked their fortunes on the concept that profit was just an abstract idea and that it created itself out of thin air.

Gone were the days when profit was the outcome of arbitrage opportunity. The notion that a profit could only be made when you bought something for less than what the market was offering was – well too boring. There was nothing exciting about a slow and methodical process by which one would identify, analyze and invest in arbitrage opportunities. Who cared about value when you could buy something hot today and flip it tomorrow when it would be even hotter?

Today the buzzword is real estate, but the problem remains the same. This time however the experts have been replaced with shows like ‘Flip This House’ and ‘Buy Me’. Now every Jack and Jill in America is convinced that they can play the real estate game and win big.  Notice I said win big; this is because many actually believe that they will win regardless of the outcome. To make matters worse, many more Americans foolishly decided to use their personal homes as ATMs; squandering whatever equity they had to ˜upgrade” their lives.

We are beginning to see the effects of this widespread imprudence, and there is more to come for sure. The worst part of this situation is not that home prices across the nation and on average may be at inflated levels, but that their exists a precarious yet logical step towards a reconciliation or market correction i.e. losing money, lots of money.  It is estimated that America will lose about 1% of its GDP to the current real estate situation and a 20% failure rate is anticipated among sub prime lenders. Unemployment, which is around 4.4% could rise by as a much as 1%.

Overall we could see higher unemployment, slower economic growth, many Americans facing financial distress and or ruin from higher mortgage payments, and a sad reversal of home ownership across America. This is yet another example of the ˜madness of crowds’ and how this irrational behavior can and usually does lead to widespread failure.  My recommendation is that we should focus our attention now to those who are weathering this storm and perhaps even profiting from it.  The game of money is a classic zero sum game – “ someone else’s ruin is another’s success.

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