-- George Bailey, It´s A Wonderful Life --
George Bailey, J.C. booster baby and lender of first resort, most popular in my (high school year) book -- a cog in the wheel of America´s economic ruin?
What an awful thing to think! It´s on a par with suggesting that All American hero Lance Armstrong used drugs.
Part 1 of this 5-part series discussed how America gave free reign to the chaos whisperer -- and nearly plunged the world into a second Dark Ages.
To be sure, no one thing caused Economic Crises I and II -- the 1980s S&L collapse and the 2007-8 worldwide recession. But neither crisis could have occurred without the chaos whisperer.
The destructive consequences of house trafficking, or flipping, go far beyond anything drug trafficking has conjured up. They also go beyond Crises I and II.
* * *
I lived for years in Mexico and Colombia. I know it will come as a shock to American readers but 99% of the people in both countries go to their work places, schools and homes without being accosted by a single narcotraficante or seeing one bullet-riddled corpse.
To the contrary, house flipping hits everyone. You can´t leave home -- or stay home -- without it.
The reason for flipping´s omnipresence is simple. The price of property cannot rise without raising prices in general.
In 1981, in my town you could rent a decent condo for $220 a month. I did it. In 1989, when I moved out, my rent had risen to $350. In 1990, a countywide real estate reevaluation took place. Due to an orgy of house flipping, values soared. The rent for the condo jumped to ... $1,100 a month. Had I stayed, what do you think I would have done to the prices I charged for my services?
I never met the new occupant. Whoever he was, he paid every day for Merrill-Lynch mind candy. Like pornography, it mostly exists in the eye of the beholder.
The Bigger Fool game is the house flipper´s version of economic development. It is amazing how many otherwise sensible people play, or at least play along with it. We call it the Surf Nazi School of Economics. It is the blood and marrow of the chaos whisperer. Its adepts are everywhere; the President´s Council of Economic Advisers and Ivy League universities are loaded with them. Priests without faith, doctors without intuition -- mystifiers mystified -- they worship at the tomb of The Unknown Consumer.
House Flipping 101
What do you want? You want the moon? Just say the word
and I'll throw a lasso around it and pull it down.
-- George Bailey --
I buy a house for $30 K and sell it to you for $60 K. As I watch you sign the papers I think, "God -- what a fool!" However, you sell the same property a short time later for $120 K. It´s your turn to smile, inwardly of course: "God -- what a fool!" But wait -- your buyer soon sells the house for $240 K. Guess what he is thinking.
Unbelievable? The above case is not hypothetical. A realtor friend in my town told me he sold the same house 3 times in less than 10 years. Each time the price doubled. Free money -- hot dog!
How high is high? How low is low? With insane answers and obscene profits blowing in the wind, the locals could not sit for long on the sidelines. A group of realtors formed a cartel and bought a patch of hog`s back land infested with rattlesnakes and scorpions. The property´s physical location matched its worth: next to nothing.
They carved it up into lots. Cartel member 1 sold a lot to member 2 for $5,000. Number 2 then sold the same lot to Number 3 for $10,000, who a short time later sold it to Number 4 for $20,000. I hope you get the picture because not everybody did. Visions of sugarplums danced in the heads of out-of-staters who heeded the siren call, "Come on down! The Price is right!"
Actually, the price was wrong. But surf nazi economics doesn´t make that distinction.
The shark feeding frenzy described above is impossible where house flipping does not occur.
"All is foam," pronounced Comte de Lautréamont,* 1800s poet and precursor to post modernism. There isn´t a stock market investor alive who hasn´t heard the expression, "The market is frothy." Imagine a market that keeps on frothing for 30 years and you get an idea of what was happening in my town.
Lesson learned: the natural inclination of house flipping is as endless as man´s propensity to plunder. If you know where the upper limit is, please let me know. You and I will split the Nobel Peace Prize.
The ultimate top aside, there are limits, both endogenous and exogenous, to house flipping.
(i) Bubbles formed by house trafficking eventually burst for the same reason chain letters stop. If a chain letter functioned the way it is "supposed" to, you who started the letter would be sitting quietly at home one afternoon when the doorbell would ring. Fleets of trucks would deliver millions of letters from Mozambique, India, Russia, France, Costa Rica, China, Brazil -- all demanding a free bottle of booze (or whatever). Talk about a comeback: your chain letter would have made it around the world.
Conclusion: if a chain letter really worked, there would be no reason to do it. Its success is predicated on its failure.
The same is true for house flipping. If everybody won, nobody would do it. In my town a family who sold the house Grandpa built immediately discovered something: the handsome profit the house flipper handed them wasn´t so handsome. The catch: they still had to live someplace. On expressing their worry, the flipper smiled reassuringly: "No problem." He took out his list of offerings which, to the family´s horror, were hyper expensive, postage stamp-sized condos with zero charm -- unlike Grandpa`s house. It was the same story wherever they turned.
In macro-economic terms, not a single penny of real value was ever directly created by house flipping. The reason is that what is gained on one side is lost on the other. Net addition to the economy: zero. But surf Nazi economics doesn´t make that distinction.
I couldn't face being cooped up for the rest of my life in a shabby little office ...
Oh, I'm sorry Pop, I didn't mean that, but this business of nickels and dimes and
spending all your life trying to figure out how to save three cents on a length of
pipe ... I'd go crazy. I want to do something big and something important.
-- George Bailey --
(ii) The second endogenous limit to house flipping is well known.
House flippers are true seekers -- not of truth or beauty, but higher rates of profit. Places like my town which "catch on" offer them something big -- way beyond Pop´s most fevered dreams.
The very influx of house flippers, however, causes the rate of profit to fall. In 1776, Adam Smith famously observed that the “diminution of profit is the natural effect of its prosperity”:
"As capitals increase in any country, the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within that country a profitable method of employing any new capital. There arises in consequence a competition between different capitals, the owner of one endeavoring to get possession of that employment which is occupied by another. But upon most occasions he can hope to jostle that other out of this employment by no other means but by dealing upon more reasonable terms. He must not only sell what he deals in somewhat cheaper, but in order to get it to sell, he must sometimes, too, buy it dearer. "**
And so, the flippers move on to greener pastures, leaving the Bigger Fool who bought late holding the bag. P.S. Early flippers clean up, but never their messes. In my town´s vernacular, they piss and run.
(iii) Often, something exogenous to the house flipping game stops it.
In my town, it was water.
Most of our water came from a subterranean aquifer replenished by mountain snow packs. With scads of newcomers digging their own wells -- a practice once tightly regulated -- and global warming reducing the snow packs, the aguifer began to shrink. The first sign something was wrong appeared in 1975. Restaurants didn´t serve water unless you asked for it. The second sign appeared not long thereafter. A friend told me he was the first person in my town to lose money on a house.
Back in the 1960s, everybody was aware of looming water scarcities. However, nothing was done to stop them because house flipping megabucks seized control and overrode strenuous scientific objections and rigorous city regulations. The flippers gave new meaning to an old expression: You can´t beat the house.
Along with the water, the news leaked out. Newcomer arrivals slowed; the housing market dried up. Today, condos bought for $500 K at the high water mark are selling for $300 K, and there are no buyers. The Bigger Fool looks at his monthly mortgage payment, twiddles his thumbs; he knows he will not recover his money anytime soon, if ever. He looks again and again at the hard numbers, downs another Tums. Good ol´ George Bailey -- house flipper? No way! But, gosh a-mighties, it´s dealer´s choice. Oh my ... read ´em and weep.
My town continues to lie about its water scarcity. Lying is part and parcel of house flipping. Shakespeare caught the drift:
We came into the world like brother and brother;
And now let´s go hand in hand, not one before another. -- "The Comedy of Errors," Act V, Scene 1 --
As Part 4 will show, moral turpitude and house flipping aren´t the only couple in which the chaperon turns out to be ... each other.
* * *
I need to elaborate on the house flipping-induced inflation mentioned earlier. It is qualitatively different from the inflation of yesteryear discussed in economics textbooks.
They say (i) there is an exception to every rule. If that is true then there must be an exception to the rule just enunciated, i.e., there is an exception to every rule.
They also say (ii) what goes up must come down.
My town was singular in both respects. (i) Without exception, all prices rose during the house flipping frenzy and (ii) never came down. Which means, the "little people," who never had money to flip houses, pay the tab for the morning-after damage every time they buy a carton of milk.
If House flipping is the whisperer of chaos in a not-so-distant future, it is the whisperer of inflation in the here and now.
I want to live again!
-- George Bailey --
In areas hit by house flipping, does economic inflation reflect ego inflation?
If so, let me know if you know the stopping point. You and I will split the Nobel Prize for Economics.
A man who should know about such things, Colombian drug kingpin Pablo Escobar, reportedly declared that anything that is dangerous is convertible into money.
Drug traffickers take tremendous personal physical risks: murder and torture by rival traffickers and long imprisonment by authorities. Exorbitant danger is factored into their exorbitant prices and profits -- but that exorbitant danger also tends to limit the number of drug traffickers.
House flipping, on the other hand, has no corporal limit. It is El Dorado without the hostile Indians. To my knowledge not a single perpetrator has ever been cussed out, much less killed. The Bigger Fool doesn´t pack a gun, although there are signs that situation may be changing.
Because there is no corporal danger and because house flippers are accustomed to taking zero financial risk -- usually a Bigger Fool is close by, if not already lined up -- not even the sky is the limit. No wonder surf Nazi economics are in.
Otherwise stated, there is an inexhaustible pool of Bigger Fools ... until the pool dries up.
Speaking of inexhaustible:
No doubt whatsoever -- drug trafficking corrupts trainloads of public officials. But so does house flipping.
You want a real life example?
The commissioners of my town hired me to design their electoral districts. One of them confided over upstream beer and gourmet pizza that he could pick up a $250 K condo for free. All he had to do was vote to reduce the tightly regulated Historic District by 30 feet.***
Corruption of that magnitude only exists where millions of dollars are in play. House flipping is ready, willing and able to supply them. Part 4 reveals where a huge chunk of the megabucks comes from. DEA and Drug Watch International, take note.
Coming soon: "The Chaos Whisperer. Part 3: Conquest Can´t Wait."
*« tout est écume. » Comte de Lautréamont, Œuvres complètes : Les Chants de Maldoror, lettres, poésies I et II, Gallimard, Paris, 1999, p. 36.
**Adam Smith, The Wealth of Nations, Penguin, London, 1997, pp. 194, 453.
***The city commissioner did not take the bait. We never discussed the subject again. I always suspected some fast-talking fast food operator wanted to sell Johnny Depp chicken legs.