WHY COULDN’T WE HAVE LEARNED ANYTHING FROM THE BEANIE BABY BUST???

The year was 1993 and the US was happy to be out of the 80’s. The beaten and tired consumer was ready for something to sink his/her teeth into... Here came the Beanie Babies—a $3.99 piece of fabric, sewn to look like an animal and released upon the world with the likes of Legs the Frog and Spot the Dog. People went koo-koo for Beanies right off the bat. Beanie addicted housewives were clawing each other’s eyes out to get the rare versions of Peanut the Elephant or Nana the Monkey… it was total chaos, with the collectable resale of the stuffed animals (yes people-- stuffed animals, and they were not stuffed with gold) shooting up 100-200% as soon as they hit the shelves.

In a sick demented way, Beanies could help explain the bubble that was created in real estate in the last few years.

The idea behind the Beanie was simple—create a product that is desirable that anyone can buy, but that will gain in value because people ‘perceive’ the product to be worth more due to the demand—sound like the 1100 sq foot Kay-bee home that sold in Escondido CA for $500,000 in 2006? It should. With Beanies, all you had to do was be at the right place at the right time. TY, the Beanie producer, created a stir by releasing small numbers of the toys and distributing them at small stores instead of chains… So anyone, at any time, could be ‘lucky’ enough to get their hands on one of the prized bears, rabbits, horeses or snakes. And with the rise of the internet, you could sell the babies with ease, to collectors across the world at a premium. At it’s highest point, a Beanie Baby sold on Ebay for $24,000...

Can't you see the similarities with the Real Estate bubble. When credit became loose (Jenna jamison Loose from 03-07), all you had to do to get a home loan was have a pulse and a valid ID— 21 year-old kids were getting $300,000 home loans because the had high credit scores (Regardless that the only credit they had was being an authorized signer on daddy’s Amex). People that drove garbage trucks were all of a sudden 'Sanitation Entrepreneurs' with incomes stated in the six figures. Loans were like crack, and everyone was addicted! People were buying up homes at 100-125% Loan to Value with no income verification and no money in the bank, site unseen from a website 1000 miles away. Getting into the real estate 'game' was easy and everyone wanted to play.

And Why?

Because Americans have been told for decades that a home is the best investment you can make! I remember my dad, smoking a Marboro, with his flannel shirt and wavy mustache, telling me that whatever I do, buy home and you will one day be rich. We have had the idea engrained in our minds that you buy a home and you automatically make equity—the imaginary wealth that somehow happens overnight when you belong to the homeowner club (sadly there are no Member’s Only jackets). And it worked! Loose credit, easy commisions and a bunch of inventory pushed people into home buying from 2002-2007. When greed tookover because rates stayed rock-bottom Greenspan/Greenback low and loans got easier to get than phone numbers at a singles mixer, people's attitude went from the idea of buying and owning a home, to the idea of turning a quick profit… and this is bad.

You see, as we take a trip down memory lane, when someone bought a home in the past (let’s take the 70’s and 80’s) the bank made you pay a higher rate to borrower the money, and you had to put some ‘skin in the game,’ with a down-payment. This forced people to ‘hunker-down’ and stay in the house in fear of losing their down payment if they sold or stopped making payments. Housing also was rising at the rate of inflation… So, while the owner paid down the principle and gained an inflation adjusted gain in value, there was equity created. This is how the miracle of home ownership is supposed to work—with supply and demand principles, along with affordability dictating the price of the property. Just like a $3.99 piece of fabric and googly-eyes is supposed to be a $3.99 piece of fabric and googly-eyes to make kids happy, a $200,000 home is supposed to be a $200,000 place to live in, that you should be able to afford, pay-off for retirement and enjoy.

While Beanies were being bought and sold for a quick profit with no real reasoning behind it, real estate found a similar cycle. When everyone can get a mortgage, regardless of credit or cash, the allure of owning the home will wane. When people look at the home as a bank and expect a home to double in price in 2 years, the glow of being a homeowner is gone—now you are an investor. And what does an investor do when an investment goes wrong? They dump the investment and look for other avenues. Sadly, the run-up in prices in many markets was due to this, and Bob and Sally Homeowner got stuck in the middle, holding a $700,000 mortgage on home that is now worth $550,000. And so is the Beanie Baby collector that spent hundreds, maybe thousands of dollars buying up stuffed chickens and cats, selling what he/she could on Ebay in hopes of huge profits. Both our homebuyer and our Beanie buyer can do is hope that the market turns. I think the Beanie Baby collector has a better chance of getting back their investment—you see, a person can buy a $4.00 toy these days, but unless you win the lottery, getting financing on the $700,000 house will take an act of god, or a HUGE W-2 wage salary, perfect credit, cash reserves in the bank and a 20% down payment at a higher interest rate… so that you have some ‘skin in the game.’ You see the lender will want you to ‘Hunker-down’ and stay in the home in fear that you will lose your down payment if you sell or stop making payments. And while you pay down principle, and the market slowly recovers to the point where the home gains an inflation based value, the magic of equity will be created!

While Beanies Crashed in 1999 (makes you wonder if all that googly-eye stuffed bear money found it's way into real estate) you can still buy these culture spawn icons @ most stores-- I believe the price is up to $4.99 now.

And like Beanie Babies, people will again start buying homes... hopefully as a place to live and raise a family, not as a 12 month get-rich-quick investment.

Oh the circle of life... and the bubble is complete!