patrick.net

My response (copied from last thread):

The Bubble-myopia has induced a pollyanna-ish inability to connect reason to what they see around them. But this is the way it has always been during every asset bubble, from the Dutch Tulip Bubble, to the South Sea Bubble, to Dot.com to now. Speculative euphoria takes hold of the collective psyche in a way that mystifies non-believers.

For some good in depth analysis, I recommend “Devil Take the Hindmost: A History of Financial Speculation”, “A Short History of Financial Euphoria” and Shiller’s “Irrational Exuberance”.

Is there a sort of mental illness (in that people can’t recognize reality) that goes along with real estate transactions in California?

It is not a mental illness, it is a tendency for people to become sheople and then finally sheeple.

Human behavior pretty much stays the same through periods of greed and fear, hope and despair. It should be readily exploitable.

1) Nearly everyone always thinks in nominal terms, not real terms. This is why the "at worst, prices will level" argument is hazardous. If prices go flat (they already have in most BA markets), they are actually dropping due to inflation.

2) People don't understand inflation at a "common sense" level. They often think they're getting ahead or gaining when they are losing.

3) People don't understand finance. Be honest, most people don't even understand how a basic mortgage amortization works (or a simple-interest car loan), let alone an exotic financing instrument. They can't calculate their own exposure to risk, or total cost of ownership.

4) People don't understand cash flows and how taxes and deductions impact them. Most people don't even know the difference between how a credit and a deduction affects them, let alone the complex calculation of how future cash flows will affect their cost of ownership burden.

5) People don't understand that RE does not appreciate any faster than roughly Inflation + Population Growth (adjusted) + about 1%. Even if you disaggregate for "prime" areas like SF, RE should not appreciate over the long term faster than at most 1-1.5% over inflation.

6) People don't undestand that their home equity is only "equity" in a personal financial, stylized manner. (Do most people even know what equity is?) Home equity is merely a personal savings vehicle; it does not create any capital, like owning a [successful] business does. All home equity eventually converts to either personal savings or personal consumption, not investment (unless it ends up as invested capital in a business). Note, I am excluding speculators and investment properties; these are businesses, not homes.

For these reasons, among others, people fall prey to the arguments SFWoman enumerated. In fact, this why car salesmen ask "what do you want to pay per month?". It works.

Once labeled a “bear” it’s like everyone you work with, for, are related to or even have the slightest dealings with, are just taunting you into some kind of “discussion”.

I do want to become a professional perma-bear some day. :)

"I had to speak with a discount broker today on behalf of a client and with their recent merger things were a mess." --DinOr

Are you talking about TD/Ameritrade? Because that merger is a mess too I can assure you!

You mean you aren’t already?

I am not a professional yet. :)

All good Randy.

Randy is our resident economist. Without him, people will have to live with my propaganda. :)