Who are these guys? The talk about who is to blame for the subprime jolt is going around as strong as ever. Consumer advocates are leaning hard on the mortgage industry. Washington is probing into the practices of the secondary mortgage market that packages loans for investors. Lenders are pointing the finger at real estate speculators. And so it goes. Oh, wait, why don't we take a look at the speculators, or investors.
Let's examine unscientifically how human nature and a market economy interact? To me one large reason to the current real estate mess is the adverse impact caused by the speculator. I can indentify two kinds of them.
One is the professional speculator. He's often called a flipper. He's knowledgeable about property values and mortgage financing and how to smooth-talk. He spends his time searching for a market about to make a move and when he finds one, he jumps in and starts acquiring assets. In time more speculators smell profit in the same market and follow the lead man in and all this fuels the rising market into a nice gallop. Early on and midway through they all garner handsome profits. If they're smart, they'll time the end of the cycle and then get off the runaway train and start the search all over again.
The other is the weekend speculator. He's your regular homeowner who keeps a half eye on the neighborhood property values and knows exactly what type of a home loan he has. All of a sudden he realizes that the house down the street sold for much more than it should've, because the pro speculators had moved in and were bidding up prices. He gets excited about the prospect of earning some real money by becoming a part-time investor. Large dollar signs dance across his eyes. He bravely buys in and soon others like him join the frenzy and so it continues until the artificially created upmarket just slams into a wall for everybody. And it's all over, the dollar signs broken up and scattered across the yard.
Those who entered the hot real estate market late are now licking their deep wounds. But the fact of the matter is that it's human nature to seek gains, or profits. In this case money. And the basis of a market economy supports that condition. As long as we have a market economy, we'll have the inevitable ups and downs because we, the people, make it behave that way. Those who choose to participate have only themselves to blame if their timing is off. And those who decide to stay out and look from the sidelines, prepare yourself early for the downturn.