The Wow Factor
FREE email from MoneyWeek
Discover the latest profit opportunities and understand what’s really going on in the investment world with our punchy daily email. CLICK HERE
This genius investor does dizzying levels of research to uncover...Half Price Shares!
Driving down route 4 in Southern Maryland, we passed a sign advertising a new housing development.
So plentiful are the new houses weeding up in the greater Washington, DC, area that one hardly notices another one. But the sign caught our attention:
“The Wow Factor” it said, in large red letters. We looked beyond the sign to see what the wow was all about. The houses were just like all the others built in the last ten years – with large, fraudulent fronts, laid up in brick, some with tall Tara-like columns and front windows so large you bend down to look for a stone.
You think they might be substantial, handsome houses. And then you see the vinyl siding and small, plastic windows on the side. They only look good from the front. And then only if you don’t look too hard. Charmless, soulless, hasty, slick – they are stacked hard up one against another like Chinese TVs in a discount mall.
“The ‘wow’ has to come at the very beginning,” explained a real-estate developer from Miami. “You bring someone to a house... he’s got to say ‘wow’ in the very first two minutes… or you won’t make the sale.”
A couple of years ago, he was building $4m houses on a golf course in the Boca Raton area. What did you get for $4m in America in those days? A lot more than you got in the UK, but still nothing anyone with a sense of dignity would want. The houses were crowded together and then covered in tropical plants so you couldn’t notice how tiny the lots were.
Just as with the houses in Maryland, the fronts appeared to have substance they mostly lacked. They were built of stone and marble. Then, you opened the door and the entryway took your breath away. Wow. You felt as though you were in a Florentine palace – or an abandoned bank. The place had so much marble we thought we were inside a quarry. And the ceiling was a good 24 feet in the air, with wide, curved stairs winding to the upper deck. Still there was something cheap about it – it was the kind of staircase up which Rhett Butler might have carried a check-out girl.
“Wow,” we said. We had never seen a place so extravagantly hideous. “Yeah – it’s all in the first impression. But so what? That’s what people want. And then it goes up in price. Or at least it used to. I made money. The buyer made money. It was a win-win situation.”
Behind the first impression was a pathetic if extraordinary house, the kind a sports star might build. The master bedroom had a bathroom as big as Charing Cross station. We looked up to see if there were mirrors over the bed (no, the owner would have to put those in himself). To the left was a practical feature, a balcony; as the housing crisis deepens, a mortgage-stretched owner could throw himself off – and drown himself near the 18th hole. “Are these places still selling?” we wanted to know. “Nah,” he said. “Nobody can get financing…” In the heyday of the credit bubble, financing houses became as fraudulent as the façades. A recent Fitch’s study found hanky panky in almost every one of 45 subprime files it examined. Between 2000 and 2006, the FBI’s suspicious mortgage reports rose nearly 800%. The gumshoes estimate that mortgage fraud cost lenders as much as $4.3bn last year alone.
The homeowner lied about how much he earned or how much he had; the appraiser lied about the value of the collateral; or the mortgage company lied about the terms of the loan. Sometimes they all lied to each other. Then along came the Wall Street packagers who told more whoppers. Bundling up thousands of fraudulent mortgage contracts they somehow managed to get the stuff rated “investable” grade, a lie so spectacularly in-your-face it practically knocked your nose off.
First impressions were everything. Executives were paid hundreds of millions to perform cosmetic surgery – trimming a little fat here, adding a little silicon there. Billions poured into hedge funds too – in which managers were paid enormous sums for investments that were no more than “heads I win, tails you lose” bets with other peoples’ money.
And private equity was another hot trend. But what were the private-equity surgeons doing except nipping and tucking, making balance sheets and earnings look pretty for the next mug to come along?
Everybody wanted a piece of the action. The gaudy, sensational, trendy, hollow, superficial – it all rose in price – from the suburban ghettos of Prince George’s county, Maryland, to the A-shares on the Shanghai stockmarket. Then the price itself became the wow factor. “How much did Damien Hirst get for that dead fish? What did the IPO come out at? How big was his bonus this year? How much did that house down the block sell for? How much is the stock up? Wow.”
What a surprise it must be when the headline numbers go down and everybody starts to lose.
FREE! For all our latest advice on making profitable investments, claim your 3-week FREE trial of the MoneyWeek website and magazine now.
Money Morning is the FREE daily email from MoneyWeek
– a punchy round-up of the latest investment news and profit opportunities.
DON’T MISS IT!
