Contagion tends to work through word of mouth

For my purposes, the contagion is the "flip your house" epidemic. It seems that constantly rising house prices, overinflated housing markets in some cities, and the ready availability of credit and adjustable-rate mortgages has not only resulted in ill-considered real estate investment, but in a flood of television shows that over-simplify the benefits (and understate the risks) of speculating in real estate investment and redevelopment. Even as the market for "flipping" slides and collapses, back-to-back television marathons reinforce the idea that a $60,000 profit is only five gallons of paint and a new kitchen counter away.

"... [In my 2000 book, Irriational Exuberance,] I argued that the feedback that creates bubbles has the primary effect of amplifying stories that justify the bubble; I called them the "new era" stories. The stories have to have a certain vividness to them if they are to be contagious and get people excited about making risky investments. Contagion tends to work through word of mouth and through the news media ..."

That's from Understanding Recent Trends in House Prices and Home Ownership, by Robert J. Shiller, who recently spoke to the annual Fed economic symposium in Jackson Hole, Wyoming.

Sure, we've seen hosts make the point that "flippers" made little profit on some projects - or even took a loss after carrying costs - but they rarely end the program by confirming the closing sale price of the homes featured.

My doubts about these programs only increase every time I see the "first open house" where supposed "prospective buyers" tour through the house. Don't you agree that most of those people look like the neighbours, around to see what's been done to Crazy Old Man Johnson's place?

What makes a twenty-two year-old bartender think he can make money flipping a house in the Los Angeles property market? And make that money in ten weeks?

I'll tell you what. An adjustable rate mortgage that doesn't actually cost anything until 12 months in, late night informercials by "real estate investors" and a promise from TLC or HGTV that he'll get "face time" on national television.

"... Borrowers with subprime credit ratings nevertheless took these adjustable rate loans with low teaser rates because they wanted to get into the house price boom that was sweeping the country ...It is widely agreed that neither the Federal Reserve nor the Government should should bail out individual borrowers or lenders whose past mistakes have created losses. Doing so would simply encourage more reckless behaviour in the future ..."

That's from NBER president Martin Feldstein, who delivered a summary of the presentations and discussion heard in Jackson Hole.

And house flipping is reckless behaviour. [tags] Flip That House, Property Ladder, flip, real estate development, irrational exuberance [/tags]