Real Estate & Mortgage Chickens Finally Come Home to Roost
I guess it's better to be 3 years early instead of a day late - which is exactly what I was in calling the real estate/mortgage market bust. My predictions are finally coming to fruition, and we're seeing the start of the Great American Debt Implosion.
Back in 1993 after I graduated college, I was a Kansas farm kid living in suburban Kansas City (Kansas side), in awe of the fancy cars and nice homes a lot of people had. I made the assumption that these folks were rich, but later found out that most folks with lots of 'bling' have it financed.
The past few years I've looked in bewilderment and amusement at how people in Colorado have afforded these McMansions, nice cars and SUVs. The answer - obviously - was/is easy credit. When Greenspan lowered the rates to rock-bottom levels, that was all Americans needed to go on a shopping spree. Instead of 're-trenching' and saving money back in 2001 (which is what usually happens in slow economic times), people just papered over the problems by borrowing more.
In the early to mid-2000s, real estate prices kept on going up and up, and there was this newfound equity folks could extract bundles of cash from - just like having their own magical ATM. But that ATM has gone up in smoke, just like a lot of sub-prime (and now Alt-A) mortgage lenders have.
Even if homeowners didn't use their house for a cash machine, folks in the past few years have definitely bought at the top - and shouldn't expect much (if any) appreciation in the short-to-medium term future. I know two couples who bought homes at a cool quarter million and half million each. They're nice homes, don't get me wrong, but I think they'll come to regret those decisions in the near future.
It's crazy how supposedly-educated Americans are so financially and economically illiterate. They buy into the myth that their home is an asset, real estate is (or was) a 'sure thing' investment, and that levels of government, corporate and personal debt don't matter.
Well, the time that debt matters is right here and right now. The Dow has gotten a 1,000 haircut in just a few weeks, The Fed and other central banks around the world have injected massive amounts of liquidity into the financial system, and Jim Cramer had an on-air meltdown, imploring Ben Bernanke to do something for Wall Street firms to save them from their own stupidity.
Speaking of stupidity, here's a flashback to November of 2006 where the Mad Moneymeister gave the 'all clear' to buy back into homebuilder stocks. The same ones that have lost 15-20% now in August of 2007. It's funny, isn't it, how CNBC and other financial shows almost never tell the investing public to sell - except when the stock has tanked so badly, the only benefit you get is a tax deduction? Like the 80s song, Things that make you go 'hmmmmmm...
For even more stupidity, here's an article trying to spin recent home sale news in a positive light. They're saying "Even though the number of sales have gone down, the average price of homes has gone up. That's why we're bullish on real estate." Note to idiots: The reason the average price has gone up is because the number of homes sold has gone down. The higher priced homes will skew that average up - it's a simple freaking concept! That's basic math 101, but maybe your classes were different in the public school you went to.
If the real estate correction were a baseball game, I'd say we're only in the 2nd or 3rd inning. We've got a long ways to go, especially with the Fed increasing money supply at crazy rates, plus oil and gas prices staying high. I don't know when the bottom will be, but I think it'll be at least a few years - maybe a decade or so - before real estate will come back.
This has been the mother of all debt parties, and the hangover will be a doozy. Prudent folks will keep their debt levels and expenses as low as possible, and keep at least a portion of their portfolio in precious metals. Normally cash is king in declining stock and real estate markets, but not when monetary inflation is around 10%/year. Even if you get 5-6% interest on your money, you're still losing 4-5% in real (inflation-adjusted) terms.
I'd highly recommend you get financially and economically literate if you haven't yet - or find someone who is and heed their counsel. Start by reading the book Rich Dad, Poor Dad by Robert Kiyosaki, and Why We Want You to Be Rich by Kioysaki and Donald Trump. You may not like The Donald, but he has a very good understanding of what's going on in America and around the world - and how prudent Americans should prepare for a very different future.
A friend of mine I had lunch with was worried about what's happening in the markets and the economy. But if you're financially and economically literate, you should be ecstatic. That's because some great opportunities will reveal themselves to wise investors. You can take advantage of these opportunities honestly and ethically, and make a boatload of money in the process.
Back in 1993 after I graduated college, I was a Kansas farm kid living in suburban Kansas City (Kansas side), in awe of the fancy cars and nice homes a lot of people had. I made the assumption that these folks were rich, but later found out that most folks with lots of 'bling' have it financed.
The past few years I've looked in bewilderment and amusement at how people in Colorado have afforded these McMansions, nice cars and SUVs. The answer - obviously - was/is easy credit. When Greenspan lowered the rates to rock-bottom levels, that was all Americans needed to go on a shopping spree. Instead of 're-trenching' and saving money back in 2001 (which is what usually happens in slow economic times), people just papered over the problems by borrowing more.
In the early to mid-2000s, real estate prices kept on going up and up, and there was this newfound equity folks could extract bundles of cash from - just like having their own magical ATM. But that ATM has gone up in smoke, just like a lot of sub-prime (and now Alt-A) mortgage lenders have.
Even if homeowners didn't use their house for a cash machine, folks in the past few years have definitely bought at the top - and shouldn't expect much (if any) appreciation in the short-to-medium term future. I know two couples who bought homes at a cool quarter million and half million each. They're nice homes, don't get me wrong, but I think they'll come to regret those decisions in the near future.
It's crazy how supposedly-educated Americans are so financially and economically illiterate. They buy into the myth that their home is an asset, real estate is (or was) a 'sure thing' investment, and that levels of government, corporate and personal debt don't matter.
Well, the time that debt matters is right here and right now. The Dow has gotten a 1,000 haircut in just a few weeks, The Fed and other central banks around the world have injected massive amounts of liquidity into the financial system, and Jim Cramer had an on-air meltdown, imploring Ben Bernanke to do something for Wall Street firms to save them from their own stupidity.
Speaking of stupidity, here's a flashback to November of 2006 where the Mad Moneymeister gave the 'all clear' to buy back into homebuilder stocks. The same ones that have lost 15-20% now in August of 2007. It's funny, isn't it, how CNBC and other financial shows almost never tell the investing public to sell - except when the stock has tanked so badly, the only benefit you get is a tax deduction? Like the 80s song, Things that make you go 'hmmmmmm...
For even more stupidity, here's an article trying to spin recent home sale news in a positive light. They're saying "Even though the number of sales have gone down, the average price of homes has gone up. That's why we're bullish on real estate." Note to idiots: The reason the average price has gone up is because the number of homes sold has gone down. The higher priced homes will skew that average up - it's a simple freaking concept! That's basic math 101, but maybe your classes were different in the public school you went to.
If the real estate correction were a baseball game, I'd say we're only in the 2nd or 3rd inning. We've got a long ways to go, especially with the Fed increasing money supply at crazy rates, plus oil and gas prices staying high. I don't know when the bottom will be, but I think it'll be at least a few years - maybe a decade or so - before real estate will come back.
This has been the mother of all debt parties, and the hangover will be a doozy. Prudent folks will keep their debt levels and expenses as low as possible, and keep at least a portion of their portfolio in precious metals. Normally cash is king in declining stock and real estate markets, but not when monetary inflation is around 10%/year. Even if you get 5-6% interest on your money, you're still losing 4-5% in real (inflation-adjusted) terms.
I'd highly recommend you get financially and economically literate if you haven't yet - or find someone who is and heed their counsel. Start by reading the book Rich Dad, Poor Dad by Robert Kiyosaki, and Why We Want You to Be Rich by Kioysaki and Donald Trump. You may not like The Donald, but he has a very good understanding of what's going on in America and around the world - and how prudent Americans should prepare for a very different future.
A friend of mine I had lunch with was worried about what's happening in the markets and the economy. But if you're financially and economically literate, you should be ecstatic. That's because some great opportunities will reveal themselves to wise investors. You can take advantage of these opportunities honestly and ethically, and make a boatload of money in the process.
Labels: bubble, mortgage, Real Estate, rich dad
posted by Brian Ochsner | 10:05 AM
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