A weekend topic starting with US News and World Report. "What takes place in investors' minds when they buy assets, hold on to stocks, trim their positions and make other decisions with their capital? Behavioral finance explores some of the common patterns and biases that shape investors' actions and, ultimately, their portfolios. These are some of the biases that drive investor behavior: Anchoring bias. Herd mentality. FOMO (fear of missing out). Confirmation bias. Familiarity bias. Loss aversion. Overconfidence. FOMO, otherwise known as the fear of missing out, is an investing bias that branches into other areas of our lives. It's one of the most powerful forces that can lead to substantial losses and ties in with herd mentality. While FOMO and herd mentality are similar, Michael Barbera, a consumer psychologist on the faculty of the University of North Carolina, says scarcity is the driving force behind FOMO."

"'In behavioral finance, the fear of missing out is categorized as scarcity,' he says. 'Scarcity refers to a cognitive bias that influences decision-making by placing an exaggerated emphasis on the limited availability of a resource rather than its actual intrinsic value. This bias can lead individuals to perceive items or opportunities as more valuable simply because they are scarce or rare, regardless of their true worth.'"

NBC Bay Area in California. "There’s some major shifts in the market showing just how much more you’ll have to pay in order to own a home in the Bay Area. Numbers from realtor.com show the median rent in the San Francisco metro area, which includes parts of the North Bay, is about $2,100 and the typical mortgage payment is about $5,900. In the South Bay, the median rent is about $3,400 and the typical mortgage payment is $6,600."

The Orange County Register. "A typical California homebuyer’s mortgage payment is up 127% – yes, more than double – since the pandemic transformed the housing market. The typical California buyer would get a $4,717 payment, assuming 20% down, on the median-priced $843,340 single-family home at this week’s 7.63% average rate for a 30-year loan. Back in February 2020, just before coronavirus struck, rates were 3.47%. So a house payment on that month’s $579,770 median price was $2,075. Yes, that 45% price hike is a huge jump in less than four years, but it’s a modest slice of the 127% surge in this house-payment benchmark. In December 2000, when mortgage rates were last at current levels, California’s median sales price was $248,000 – then the fourth-highest on record. That means prices have increased 240% (nearly triple) over 23 years. Incomes meanwhile are up only 96% in the same period – not even double."

"Rates near quarter-century highs are quite a pandemic-era switch. Initially, the Fed backstopped a coronavirus-chilled economy with cheap money. Mortgage rates hit a historic low of 2.65% in January 2021 and stayed below 4% until the spring of 2022. So who can afford to buy? Well, look at it this way: California sales activity is so depressed it’s running near lows not seen since 2007, the bubble-busting days just before the Great Recession’s financial meltdown."

The Coast Report in California. "The Economics and Future Outlooks Club at Orange Coast College attended the 29th Annual Economic Forecast Conference at Disneyland Hotel on Oct.19. Anil K. Puri, director of the Woods Center for Economic Analysis and Forecasting for CSUF, discussed the role of inflation and unemployment rates in terms of Orange County’s economic status compared to other cities in California. According to Puri, unemployment rates in Orange County are going down, and despite job growth slowing down, the market is comparatively still above the historical average. 'Home values have recovered but affordability is at a record low… it’s worse than the 2005-2008 housing boom/bust by 20%,' Puri said."

The Wall Street Journal. "David Siegel went to work for an affiliate of Guaranteed Rate in 2021 and got a signing bonus of more than $100,000. Interest rates were super low, and mortgage bankers were raking in cash. Now that business has dried up, the mortgage company wants its money back. He said it fired him one month shy of the date when it could no longer ask for the bonus back, then demanded the money. Guaranteed Rate and its affiliates are also telling hundreds of other former employees that they have to return their signing bonuses, people familiar with the matter said. 'It seems like they realize they aren’t making money in their mortgage business, so the way to get income is to claw back the payments,' said Siegel, who is based in New Jersey."

"The mortgage industry is notoriously boom or bust, but this bust is especially bad—and it’s only getting started. Unlike previous housing downturns, there’s no obvious way out. If the economy keeps chugging along, then the Federal Reserve will continue to keep rates high—which would in turn keep the housing market in the dumps. If the economy sinks, the Fed may loosen rates—but a recession wouldn’t do the housing market much good either. Many mortgage companies are growing desperate. They are laying off workers, merging with other lenders or exiting the business altogether."

"Just a few years ago, the mortgage industry was in the middle of another extreme: a record boom. The pandemic ushered in low interest rates that prompted millions of homeowners to refinance and others to buy bigger homes. Lenders wrote trillions of dollars worth of loans and added staff at a rapid clip, often paying up to do so. But when the Fed started hiking rates last year, the industry quickly swung from feast to famine."

"The mortgage market used to be Steve Walsh’s cash cow, but now it’s squeezing him on both sides. Business at his Scottsdale, Ariz., mortgage brokerage, Scout Mortgage, is down about 90%, he said, and head count has fallen to seven from a high of about 25 at the end of 2020. To save money, Walsh wants to downsize. But he has been unable to sell his 7,700-square-foot house at the $3 million he is seeking. 'We got the rug-pull of our lives, everyone did,' he said. 'Rates are not supposed to be here.'"

The Globe and Mail in Canada. "As the Toronto-area housing market heads into the final weeks of 2023, real estate agents are wondering if indecisive buyers will be able to overcome their inertia in November. Patrick Rocca, broker with Bosley Real Estate, says sales have been so tepid amid rising inventory in September and October that he’s advising homeowners in some cases to at least consider delaying their listing until buyers perk up. 'If you don’t have to sell, maybe you should wait until spring.' In the current environment, Mr. Rocca says showings are down in every segment of the market as buyers fret about interest rates and the economic outlook. 'It’s a tough, tough market,' he says. 'Buyers are scared. I think they’re waiting for stability.'"

"Mr. Rocca adds that prices have softened in the Greater Toronto Area. When aspiring buyers see that trend, they wait to see if they will drop further. Transactions are still taking place, he says, but days on the market are longer and prices are soft. Meanwhile, inventory has been building since national listings hit a 20-year low in the spring. 'There’s a lot more product and we’re not seeing many more sales.' Houses are sitting for lengthy stretches when sellers are holding out for lofty prices. 'They’re stretching for prices that were there in April, May, maybe last year.'"

"Mr. Rocca is not seeing a lot of homeowners selling because of financial stress but he has heard from some in the industry that those numbers are rising. Often homeowners list because they are moving up or downsizing to another property and it’s essential they sell their existing home. 'The people who need to sell – and there are many – they’ve got to be realistic,' he says. He points to the example of one homeowner who recently told him he was hoping to fetch $1-million more than Mr. Rocca figured the property would sell for. For such owners, he believes waiting until the spring for the possibility of a bounce back is the better option. 'If you’re not going to be realistic, why bother?'"

From News.com.au. "The number of business insolvencies surged to its highest level since 2015 in the three months to September 30, with construction industry collapses leading the way. The data, from the Australian Securities and Investments Commission (ASIC) shows that 2486 businesses hit the wall during the last quarter. It’s the largest number of insolvencies reported in a single quarter since the December 2015 quarter, when 2499 businesses collapsed. Of the collapses in the September quarter, 783 of them – or 31 per cent – were in the construction industry. For the same quarter in 2022, 605 construction firms failed, while the September quarter of 2021 booked just 238 construction failures."

"Liquidator Nicholas Crouch, from insolvency firm Crouch Amirbeaggi, told news.com.au that he was 'not surprised' that insolvencies in the construction sector had leapt over the past two years. He said the hundreds of billions in Covid-19 stimulus pumped into the economy by the Australian government helped prop up struggling business and resulted in long delays between an insolvent event and liquidators being called in, as business owners tried to hang on. During Covid, the government relaxed the threshold for creditors to issue statutory demands for payment and the time frames for businesses to respond to statutory demands for payment. Directors were also released from any personal liability for trading while insolvent during that time, and insolvencies fell dramatically."

"Mr Crouch described the size of the pandemic stimulus as 'bad economic management' and said that the government 'got it wrong.' He said that the higher interest rate environment meant it was unlikely that the pain was over for the building sector. 'Construction is getting totally hammered by interest rates,' he told news.com.au. Mr Crouch added that when the relaxed rules and added stimulus during Covid combined with 'historic low interest rates that were out of kilter with the real level of economic distress' the uptick in insolvencies was inevitable. 'You can’t have zero per cent interest rates and not expect consequences. You can’t have too much sugar and not expect a crash.'"

From Scoop. "Today I read this article (David Seymour calls for sweeping changes to make the Reserve Bank more accountable, NZ Herald, 26 October) showing David Seymore's wish to double-down on New Zealand's financial model. The Ponzi financial model operates much more broadly than the fraudulent Ponzi schemes associated the likes of players Bernie Madoff and Charles Ponzi. In particular, the model can and does operate without the fraudulent deception of these renowned schemers. And it can operate on a global scale."

"Ponzi finance takes place when 'investors' (people wishing to make money from unspent money) advance saved funds to 'players' (understood by 'investors' as 'intermediaries' such as banks or funds managers). Ponzi players then use the funds for their own gratification (gambling or consumption) rather than reinvesting those funds into a venture which would be expected to yield a profit. Instead of servicing the 'investors' with genuine earnings, Ponzi players service existing 'investors' by borrowing from new 'investors'. A Ponzi player 'borrows from Peter to pay Paul', rather than paying Paul out of income earned. Peter and Paul are example 'investors'. (In a fraudulent scheme, one could say 'rob' instead of 'borrow'; although even in fraudulent schemes 'investors' only actually lose when the scheme unravels.)"

"(Note that 'investor' is one of the most ambiguous words in the English language. In correct economic language, a saver is not an investor; but a true financial intermediary – such as a legitimate bank – is an investor. An investor is a spender, or a direct financer of spending; a purchaser or manufacturer of new assets. A true investor is neither a saver nor a consumer nor a purchaser of existing real or financial assets. Essentially, an investor operates a productive business or acts in a businesslike way, sinking capital and awaiting an eventual return in the form of profit or interest. Investment is 'giving up something real to create greater future value'. Investment is not the purchase of existing assets in the hope that those assets can be sold in the future at a higher price; such speculative behaviour is gambling, though not all gambling is imprudent. Genuine investment may be called productive gambling, whereas speculative 'investment' is unproductive gambling.)"

"Non-fraudulent Ponzi finance takes place when there is no overt deception. 'Players' and 'investors' are open about their activities, though there may be degrees of naivete or self-deception on the part of either. While the Ponzi financial model was not fully operable in New Zealand until 1993, it was established in 1985 with the deregulation of the financial sector and the adoption of a monetary policy which ensured that interest rates would be high enough to attract Peter's and Paul's money."

"Should New Zealand Incorporated shift to another financial model? Yes, because ultimately two wrongs do not make a right. And because this model underpins the increasingly grotesque inequality we see in Aotearoa New Zealand. And because the two extranational Ponzi games which we are familiar with from the late 2000s, that played by Iceland's banks and that played by the Southern Eurozone (including Ireland who got away with it; see Economic Growth, Ireland compared to Australasia, Evening Report, 12 Oct 2023), both crashed and burned soon enough."