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Who Burst My Housing Bubble?

There is no new news about the collapse of the housing market. There is news, however, about what the courts may be doing in reaction to it.

One of the more venturesome cases was filed in federal district court by a class of home buyers against essentially all of the major homebuilders doing business in this country. ( Maya v. Centex Corporation, et al. , Ninth Circuit Court of Appeals [September 21, 2011]). The case came up on appeal to the Ninth Circuit here in California after the District Court had dismissed the complaint for lack of legal merit. The Ninth Circuit reinstated the case in what I view as a bizarre opinion. (Footnote: The United States Supreme Court chooses which cases it will review after a decision by any of the 12 circuit courts of appeals, including the Ninth Circuit. Significantly, about 47% of the cases selected by the Supreme Court come from the Ninth Circuit. One can describe the process as tightening a loose screw.)

Let's begin with what the creative lawyers in the Maya case argued on behalf of the plaintiff class of home buyers. The complaint alleged that the homebuilders had represented, at the time of sale, that they were building "stable, family neighborhoods" consisting of owner-occupied homes. Instead, the homebuilders marketed homes to "unqualified buyers who posed an abnormally high risk of foreclosure." In addition, the homebuilders had sold homes to investors who had no intention of living in them and who therefore were more likely to walk away in hard times. Further, the home buyers alleged that the homebuilders themselves had financed about two thirds of the mortgages and thereby created a "buying frenzy." As a result, the home buyers alleged they wound up paying more for their homes than those homes were actually worth at the time. In essence, the home buyers claimed that they were the main victims of the subsequent collapse in home values.

The District Court dismissed the complaint for two chief reasons: First, since the home buyers had not yet sold their homes, any economic injury they might suffer remained "speculative." Second, the home buyers could not demonstrate any cause-and-effect relationship between what the homebuilders did and the economic loss the home buyers might eventually suffer. In other words, the marketplace produced the loss, not the homebuilders.
The Ninth Circuit rejected the first reason, agreed with the second reason, but thought the home buyers might be able to get around the problem of causation through expert testimony at trial. So the case was reinstated.

The Ninth Circuit's opinion looks like sheer --- meaning transparent --- nonsense to me. It is as though the home buyers played no role in their own decision to buy homes in an overheated market and therefore should be absolved from the risk of loss.

Now I do not claim to know what the homebuilders meant when they advertised "stable" neighborhoods. Did they mean that homeowners would not buy and sell their homes every month? Or did they mean that tranquility would prevail in the neighborhood? Or did they mean that no homeowner would ever fail to pay his mortgage? This last meaning I find questionable.

Whatever the meaning, shifting the economic loss from the homebuyer to the homebuilder seems unconscionable in this context. Sometimes everybody loses. This is one of those times. I don't see why only this group of home buyers should be immunized from the loss. Their homes were worth exactly what they paid for them at the time. That is literally the definition of fair market value. It should come as no surprise, then or now, that the homebuilders engage in the business of making money by building and selling homes. Why wouldn't they do what looks like a good business practice at the time? Even if later it proves disastrous?

The same is true for all buyers, the plaintiffs in this case or the ones who let their homes go into foreclosure. None of the buyers bought in order to have the pleasure of watching their property decline in value. They hoped for perpetually increasing values. They were deluded. So were many others.

It is human nature to scramble for the last seat in the lifeboat. At the same time it is not just to make an extra seat available by throwing its current occupant overboard.

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