There’s an awful lot of debate about who is to blame for the current foreclosure crisis and who should, or should not, be bailed out. Some folks are down right angry.
My father was a logic and philosophy professor. As a kid growing up I was allowed to do almost anything I wanted so long as I could make a valid argument for doing it. This was much harder than you might expect thanks to the many fallacies that rendered my arguments invalid in my father’s eyes. That my teacher said it was true didn’t make it so (the appeal to authority fallacy). But of all the fallacies that my father used to thwart my plans, the one I remember best is the post hoc ergo propter hoc fallacy – which says that just because something happened first doesn’t mean it CAUSED what happened next.
Subprime loans were the first to foreclose, but that isn’t enough to prove subprime lending caused this crisis. Speculation is correlated with foreclosures, but is it really the cause?
In a recent interview with a major newspaper the reporter asked the following: “As a speculator weren’t you partially responsible for the current foreclosure crisis?”
I was actually glad he asked. It gets to two things that I believe are largely misunderstood – the difference between speculating and investing and that this “crisis” was caused by Wall Street, and K Street, not Main Street.
The difference between speculating and investing is that speculating relies on future changes in market prices, while investing does not.
When I began seriously investing in real estate in 2002, it quickly became apparent that most so called residential real estate investors were actually speculators betting that prices would go up. And for a number of years they were right. When appreciation was at 20% annually you really couldn’t make a mistake.
Or could you?
Foreclosure information services are not new. Some local services have been in business for more than twenty years. Surprisingly though, there has been almost no innovation in this space since the dawn of the Web. These service providers do little more than collect and distribute foreclosure notices that are available free from the County Recorders Office.
Most of these services share another trait: the not-so-subtle scent of hucksterism. Promises to get rich quick, save 50% on your next house, or buy with no money down are rampant. Recently, this has produced a counter-trend, so called “white knight” investing. But the chivalry is only skin deep. Many who would train you to be a white knight will also tell you to press homeowners for at least 30% off, and talk in shrill tones about all the money you can make.
Give me a break.