10 May 2011

California Mortgage Market Has a Bad Hair Day (or, how to make a billion dollars a day)

As of 2000, a Californian who wanted to sell home loans could get a license without taking a single class. By contrast, to become a professional barber he or she would need 1,500 hours to qualify for a state license.

From this simple contrast, we can conclude which of the following?

1. Californians better understand the consequences of a bad haircut than they do a bad home loan.
2. Financial market deregulation became confused with financial market anarchy just before the bust.
3. Appearances are everything.

Oh, wonder why jobs still aren't coming back into the construction industry? It is possible that the market got a tad over-built as a result of sub-prime mortgages. Between 2000 and 2005, the volume of sub prime loans quadrupled. Not only did house prices rise, but so did the amount borrowed against them and the number of houses built.

One hedge fund manager who bet against this bubble began to make one billion a day in 2007 when the sub prime market began to unwind. Now, four years later, the construction industry still has not recovered.

Financial markets are competitive, and that's good. But like sports, even competition - especially competition - suggests the need for rules. Just think how much better off we'd be if we took finance as seriously as sports and properly made and enforced rules to keep play fair. Or even if we took finance as seriously as haircuts.

Facts taken from Sebastian Mallaby's More Money Than God: Hedge Funds and the Making of a New Elite, pp. 323-331.

1 comment:

Lifehiker said...

Californians, in general, seem to have very poor memories. How many boom/bust cycles has California real estate been through in the past century? I agree that government should set minimum standards for home loans, but, golly, maybe Californians need to curtail their greedy instincts as well. My own response to skyrocketing real estate prices in the Irvine, CA, of 1977 was to take my profits and leave the state; it was crazy to remain in a place where the only topic was "how much is your home worth THIS WEEK".