Chris Martenson: You know Ben, a really important point that I don’t know why it had to be drilled into me this way. Because if you just live out here in the world of receiving your news from the newspapers, you will that message which is, oh, look these people are wealthier because their houses are going up in price. So that whole thing is just marketed constantly. It says your house is an asset. Your house is an asset.
Well, I’ve been hanging out with Robert Kiyosaki and I think it was probably the third time I heard him say the same story, but he drilled into me finally that your house is not an asset. An asset puts cash in your pocket. If you really examine what a house is, it’s a major cost center for everybody if you’re living it. You’ve got taxes, which are going through the roof in a lot of locations. You’ve got of course, all the maintenance. You’ve got insurance. You’ve got whatever interest payments you’ve got going on. This thing is a major cash sucking machine. A money pit. Therefore, it’s not an asset and somehow that all got reversed into this idea that your house is an asset. But I think we can expose this.
Let’s imagine some on Mercer Island. They decide to sell their house. So now they’re rich. But what would they do with that? Well, now they have to…the only way you can tap that equity is to move to a place with lower cost housing and buy another money pit and hopefully capture some gains difference. But otherwise, it’s not possible, by definition for everybody to get wealthy because their houses go up in price because everybody's got to live somewhere. The whole thing just falls apart as soon as you look at it even slightly rigorously, I think
Ben Jones: Well, right and all you have to do is listen. I don’t know about your radio, but when I listen to the radio all I hear is cash out refinance commercials, Rocket Mortgage. That’s how it works is the musical chairs. That’s why you read so often about people in California. Well, we’re moving to Arizona, or we’re moving to Nevada, or we’re moving to Oregon. Yeah, that works for a while, but it’s not sustainable.
Chris Martenson: Right. Well, absolutely not. So let’s talk about these bubbles then. So as far as I’m concerned, a bubble always needs two things. You need the story. There’s some story. It’s eyeballs. Elon Musk is going not create electric cars for everybody in the world. There’s a story and its usually got a good nugget of truth buried in it somewhere and you need credit. This is the thing. Like the tulip bulb crisis mania back in the 1600s in Holland. That couldn’t have happened without letters of credit being issued. So you need credit, because again, back to the definition of bubble. Occurs when asset prices rise beyond what incomes can sustain.
So we can all chortle and laugh about tulip bulbs, because obviously there was no income or cash flow associated with those things. But the same thing is true today in housing and just slightly more complicated. So you need the story, you need the credit. What kind of stories need to be told in order for…let’s pick on an area. I don’ know, let’s pick San Francisco Bay Area where I understand a local governance board has decided to…if I have the numbers right in my head. This is off top my head. But they’ve said well, to be qualified as a poor family now, to qualify for housing assistance, a family if they have an income up to 108,000, they’re poor.
So here we have an example of a place where it’s literally impossible for an average family to own an average house. Yep, there’s a story that has to go along with that which says, well, this is reasonable. Rational. It’s not that the house prices are wrong, there must be something else wrong with the story so that you have local governance saying, you know what we’re going to do? We’re going to help people afford the houses. Because there’s nothing wrong with house prices. We we’ll help them get into affordable housing with air quotes around that word affordable. Talk to us about this idea of what the story needs to be and the role of credit in creating these things.
Ben Jones: Well, the story is in the Bay Area well, we’ve got all these tech jobs. Which in my opinion the tech jobs are part of the bubble as well. You got all of these companies out there that don’t make money. But somehow are worth billions of dollars. Basically, like bed-and-breakfast, air B&B kind of things. But yeah, I mean if you look at the credit, the first thing that happened when the housing bubbled popped was Fannie Mae and Freddie Mac increased the loan caps for California. Now that happens whenever the jumbo loans went way.
So why did the federal government feel a need to increase loan caps for California at a time when prices were collapsing. That made no sense at all. Now we find that the federal government is basically guaranteeing not…close to 90 percent of the home loans in the United States. Before the housing bubbled popped, I think it was in the 70s, 70 percent. So that’s the credit. The credit is endless. It’s an endless well that’s coming from just the government. The federal government.
Chris Martenson: Yeah. Well, the headwaters of that particular river the central banks, but you’re right. Having Fannie Mae, Freddie Mac, and also I believe FHA loans; I was surprised how quickly they walk those all the way back to needing a three percent down payment. Which is just an insanely low thing. Of course, house prices…if people don’t…people don’t’ buy the house anymore. They buy the monthly payment. So as long as interest rates were falling and they were extremely low. Generationally low.
My first mortgage was at 12 and a half percent in 1988. So as long as mortgage rates were down there in the three and a half, four percent range, you could afford a lot more house in terms of price. Now that interest rates are rising, we’re obviously seeing some stress and strain. So let’s talk about that now Ben. In your view A, where do you see bubbles? What you would call housing bubbles. B, would you agree that many of those are arguably quantitatively passed peak and starting to fall?
Ben Jones: It’s hard to say. It’s a much short list to say where’s not bubbles.
Chris Martenson: Well, pick some of the worst ones.
Ben Jones: The worst in the world or in the United States?
Chris Martenson: Let’s take a world tour and then we’ll come to the US.
Ben Jones: Well, Hong Kong, China, Sydney, Australia, Auckland, New Zealand, Dubai, London, France. The United States I would say Seattle, the Bay Area, almost all of Florida, New York, Massachusetts. I’m here in Texas right now and it used to be the…these houses were 30, 40,000 dollar and now they’re 250, 350,000 dollars. In Dallas, which is falling right now, people don’t really blink buying a 250,000 dollar house; spending 10,000 dollars on it and then putting it back on the market for 350. I got to tell you, the people in Dallas don’t make enough money to afford that. It just got out of control. For whatever reason, these central bankers and the governments did this. I cannot speak for them. I don’t know what their motivation…well, I have my suspicions. But they just let it get out of control and it’s really unfortunate, but there is going be a price to pay I can tell you that.
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