JWM, my background is in corporate finance and accounting. As a former CFO, my job was primarily financial analysis, and for large general construction and engineering firms that were clients of ours. As such, you get very good at slicing up the numbers and, with construction and engineering firms, cash flow is key.
I make the same point in my conversations with folks about housing, credit and net worth. I have been harping on the housing market for over three years now, and I personally remember the last bust (1989) here in SoCal.
Based on the reactions I get from people, you’d think I had grown a third eye. Basic macroeconomic theory and fundamental financial principles go right out the window when you discuss housing in SoCal.
The irony is that many of the people I speak with are college educated, white collar professionals with more than a passing knowledge of finance. A quick glance at history shows the Dollar Bubble (1997) and the NASDAQ bubble (2000) bursting, but somehow the housing bubble is not only different, but immune from both historical precedent and the laws of economics.
I saw the exchange with Scruffy a few days back, and he represents an archetype of what I loathe most about this situation: Someone who should know better, and probably does, but steers people into a horrifically bad decision regarding the largest purchase of their lives.
You mention income level. I purchased a house in Fallbrook in 2003 for $425k, with $75k down. The monthly payment represents less than 20% of my monthly net, but I remember being nervous about committing to a mortgage of that size. Looking at some of the mortgages being secured at present, and for houses that are completely over-valued, I realize how truly out of whack both the market and the accompanying Pollyanna mentality are right now.
Hang on and enjoy the ride, because when this market corrects, it’s going to be real ugly.
