In Sell Now, John Talbott devotes an entire chapter to housing as a Ponzi scheme. Ponzi schemes are pyramid schemes in which early investors are paid extraordinary returns on their capital, supplied by later investors, and nothing productive is ever invested in. Because housing markets and values are so poorly understood by the people buying them, it is perfectly suited for a Ponzi scheme.
“Homeowners won’t like to hear this, but their naivete about investment valuation in general plays right in line with the Ponzis. A simple review of the reasons many people give for the housing boom, such as those presented in chapter 5 [population growth, higher incomes, increased construction costs, strong economy, supply/demand] demonstrates that they have very little knowledge about how markets really work or what the real historical price data show. Most homeowners do no more pricing or valuation analysis than asking what their bank will lend them, or what a similar property sold for across the street. If markets can go completely Ponzi on you, then depending on market-based appraisals is self-defeating….
The timing of this housing bubble also couldn’t be better for a Ponzi scheme. We live in a casino society in which profits are being created with great risk but not much hard physical effort….
The central question, and the key difference between a casino economy and a healthy productive economy, is whether anything of real value is being created in the process…If all we are doing [in the housing market] is shuffling assets back and forth, it is hard to argue that any great value is being created…A great deal of our investment capital is gonig to increasing consumption to the detriment of real, meaningful, productive investment….
Rather than learning their lesson when the Internet stocks crashed, people seemed thrilled to move to the housing market to continue their money shuffling ways….
At some level Ponzi schemes have to be corrupt. If you are trying to sell to a greater fool before the market crashes, with no regad for how he recovers his investment, you are part of the moral problem [that’s me, powayseller]. If you are a real estate professional who is pushing a personal profit agenda rather than providing the best advice to your clients, you are a part of the moral problem….[He also holds accountable regulators who don’t crack down on the GSEs, Congress, Fed, FDIC, lenders]
[The Midwestern states are] more grounded, more skeptical, more conservative. Such qualities usually don’t play well to a Ponzi scheme promoter….
Market economists do their analysis a disservice if they totally ignore the possible behavioral effects of herdlike investing. If sellers and homebuilders are realizing extraordinary profits, buyers must be paying extraordinary prices. If they are hoping for greater fools to pay even higher prices in the future they may get caught in the deceitful web of Ponzi.”
