Tag Archive for recession at Zeal For Truth

Tag Archive for 'recession'

How to Mess Up Your Life: Buy A House

Published by Colin March 10, 2008 in Essays. 39 Comments

Let me begin by declaring that I am not a Realtor, government official, investor or another other expert in the housing market. However, I have spent several years working for a Real Estate and Mortgage company (and watched it go from a local powerhouse to a failed business) and I have watched the housing market for years. Here are a few of the things that I have learned:

Buy! Buy! Buy! Now is the Time to BUY!
In doing the marketing for a Real Estate company during both a boom and bust in the market, I can tell you with confidence that the realities of the market have absolutely no bearing on the use of the term: “now is the time to buy!” While the company was laying people off left and right, and agents who had done business for twenty and thirty years were falling by the wayside - their dying words were all about the housing market being strong as ever.

When things were going well, they cited the statistics on house prices rising to point out a great investment. When things started going upside-down, they cited the statistics on new homes available (actually an indicator of market instability, but gullible people don’t do research).

The Sheep Lifestyle Pattern
The problem with housing is that a basic lifestyle pattern has been hard-wired into American society. It goes something like this:

Graduate High School
Go to college
Marry
Have a Couple Kids
Buy a Minivan/SUV
Buy a House

People obey this pattern like sheep eating grass, although sometimes changing the order of the last three. They go to college, whether their career demands it or not (and get into debt). It boggles my mind that women especially do this, seeing as how many of them do not pursue work that requires a college degree and many want to raise their children. People then can go into more debt for their wedding. Their SUV/Minivan purchase is usually a newer vehicle (and incurs debt).

Lastly, regardless of where the market is, they take out another $150,000 - $300,000 in debt for a three bedroom, two bathroom house with hardwood floors, vaulted ceilings and a nice backyard. Despite housing being somewhat volatile (especially in the short-term), the largest purchase they make is usually made completely ignorant of the market.

I really cannot explain why people do this. I have always had small cars, they drive great, efficiently and I can fit all my guitars and stuff in them. If I need to move something, I borrow or rent a truck. I have always rented - I don’t have to pay for maintenance, it is cheap and I have complete freedom to find something better or cheaper on short-term notice.

A House is Always a Good Investment
This is not true at all. It is especially not true if your house is costing you over 25% of your income, you have little or no equity and you buy it anytime from 2006 to the next five years. One thing more unstable than housing is employment. Everyone almost certainly will go through periods where work is harder to come by. Being responsible for a high mortgage regardless of this fact will get you foreclosure after being unemployed only a few months. Your house will then be sold for less than you bought it and you will now be homeless, a debtor and have dependents who cannot be fed.

A good investment is something like mutual funds or even treasury bonds. A house can be a good investment, but not if the market is ignored.

Buying a house right now as part of the sheep-lifestyle, for example, (depending on local factors) is suicide. If (and I mean if) you can hold on to your house through the next five to ten years of depreciation and flat-prices (a predictable pattern based on equity, supply, interest rates, etc…), then you might make it out with only a few scratches and bruises. That is, if you hate your job now - learn to like it because, you cannot go without work for very long while trying to pay a mortgage. In fact, expect your general quality of living and free-time to evaporate as you break/fix things, worry about the bills, pay your debts, work a job you hate and forgo recreation and relaxation activities.

Why You Should Ruin Your Life
The most recent doomsday statistic for housing is this one: equity has now reached record lows below 50%. This means that there is a significant portion of the housing supply on the brink of being vacant. Why? Because the economy is on the brink of recession. Unstable employment, means unstable mortgage payments, which means foreclosures, which means lots of houses suddenly for sale. Lots of houses for sale in an economy where people cannot buy them either because they have no jobs or the interest rates rise (very likely) causes the price to plummet. I’m not making this up - this has happened before.

A normal housing cycle happens based on over-construction and malinvestment. More houses are built than demanded during the boom, sowing the seeds of a small bust in the future. We hit this last year. However, this can be compounded by market failures, lending failures and government failures (all of which are likely to hit in the next decade).

I admit that there is some selfish anticipation on my part about this upcoming market bust. When housing prices plummet and interest rates rise, I will not have participated in the debacle. I’ll have good credit (by not going bankrupt over my too-big-for-my-britches house) and have plenty of equity cash (from saving it and not buying said house). I look forward to buying about two or three houses, and selling them at the peak of the next boom to put my kids through college and buy the wife a new bedroom set.

Attack of the Business Cycle: Why More Rate-Cutting is Killing the Economy

Published by Colin January 22, 2008 in Current Events. 11 Comments

America is likely entering its next great recession and pottential depression.

Ben Bernanke has chosen to undergo some of the most reckless Fed policies of the modern era, as today the Fed cut interest rates by .75 points - demonstrating to the whole world that it is in panic mode about the short-term future. Yesterday world markets dropped drastically as the rest of the world, still heavily tied to our currency and government, realized their mistakes as well.

Most people presume these cycles are completely natural fluctuations in the market - isn’t that why we have the Fed in the first place? To speed up and slow down the economy so we all have an easy ride? Or, even more ignorantly, isn’t this all just a result of corporate greed and vice?

It may be surprising, but the second one is partially right.

The Anatomy of a Crisis
The Federal Reserve has virtual monopoly control over interest rates and currency creation. When interest rates are low, more people can get their hands on large sums of money and use it to invest and consume, stimulating the economy. However, because the money is so easy to obtain, many people in all classes and professions (whom the market would never have permitted to acquire it) malinvest. Poor people buy houses they cannot afford, middle class people buy properties and start businesses and wealthy people invest in new (and riskier) ventures. And consumer spending skyrockets, making it all seem justified. It creates a massive economic party that everyone is invited to.

But the money was too easy, and those who obtained it for little cost went and did dumb things with it. The poorer people who extended themselves to their maximum debt to buy a house, are the quickest to topple. They lose their house, or have to make massive lifestyle reductions and can no longer spend gobs of money on the junk that the middle-classes were peddling to them. The middle-class businesses that the wealthy invested in fail, and massive amounts of money disappear into dust and ruin.

While these groups were obviously responsible for their bad decisions, it was the easy money that was initially created by the fed that is ultimately to blame.

Analogies to the Crisis
Like any party - the drinking, sex and revelry all feel good in the moment, but in the morning it brings sickness and regret at best, and at worst, you wake up next to the biggest mistake of your life. So too does the Fed, by the very practices which are intended to bring growth, actually sow the seeds of recession, depression and financial crisis.

Milton Friedman once wisely compared the easy money of Fed creation to a drug addict. To avoid becoming sober and dealing with the physical, emotional and psychological consequences of abuse, the user continues to get high - desperate to avoid reality and live in a fantasy world. The addict knows that when he goes off the drugs, he will have to face the accumulated consequences of his lifestyle. They may last years, even be permanent, but he will be better off in the end by sobering up.

If the market determined interest rates, then as soon as investments began to sour, the rate would be increased by private banks to ensure that they were not losing money. Corrections would be small, localized and manageable. With one institution, and one oligarchical board controlling the essential mechanism of the economy, we are merely passing time until a major collapse. Interest rates and currency management, like all goods, services and prices, cannot be controlled by even the wisest of men and must be left to the market to determine to avoid the poor driving of the Fed.

Here Come the Effects of Inflation
The Fed Rate cut has other drastic effects which hasten the coming of the bust period. Part of the mechanics of lowering the rate, is to liquidate debt. That is to move virtual dollars into physical ones. More dollars chasing the same amount of goods and services causes prices to rise and brings inflation. During the initial boom, this is great - everyone has more money to throw around. But soon the market realizes this and prices shoot up, causing a decrease in living standards and economic activity.

In other words, the inflation is not about to commence, but was started after 9/11, after the dot com bust and after the housing bust. Its effect has merely been staved off by even further inflation.

These most recent rate cuts are only going to heap more negative consequences on the economy. We’ve dealt with the last three busts (dot com, 9/11 and housing) by behaving this way - by taking another swig from the inflation bottle and toasting to our health. The consequences are compounding, growing and will soon bring this country to it’s knees. Do we have the courage to stop now, deal with the consequences, and return to a normal and prosperous economy?

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