Dr. Housing Bubble 10/28/09

[Crewleader]

Real Homes of Genius: Culver City and the Housing Stockholm Syndrome. Approximately 5 Percent of Current Home Price is related to Government Bailouts.

Only looking at economics for an answer to the housing bubble mania will leave you with many questions unanswered. As in most manias, there is a large element of speculation and irrational exuberance as the godfather of bubbles Alan Greenspan once said. Yet what most on Wall Street and the government lack is some basic understanding of human psychology. There was very little reason to believe in the economic long-term viability of a product like option ARMs for example. These mortgages derived from an economic model that was operating in a mania. They assumed the mania would run forever. The Alt-A and option ARMs were simply manifestations of a human speculative fervor that believed in the housing mammon. In fact, there was a large contingent of people that simply believed that housing values would never fall. No basis in economics or market fundamentals. In other words, it was a classic bubble.

Yet what is currently occurring in the housing market is similar to a victim suffering from Stockholm syndrome. Stockholm syndrome is a response seen in some hostages in that they feel some sort of loyalty to the abductor. Why does this even occur? One of the theories is based on the framework of cognitive dissonance. People don’t like being unhappy for long periods of time so the idea goes, that some of these victims start loving or identifying with their captors. Now I see many elements of this in the way we are dealing with our current financial crisis. All of a sudden, the government, Wall Street, and many Americans are starting to sympathize with the actual perpetrators of the biggest fraud in a generation. Instead of punishing and fixing the system, many are looking to the banks for assistance.

As it turns out, some of the pricing in housing is now based on government intervention:

http://www.doctorhousingbubble.com/real-homes-of-genius-culver-city-and-the-housing-stockholm-syndrome-approximately-5-percent-of-current-home-price-is-related-to-government-bailouts/