Commercial Property
The Perfect Real Estate Storm Gathers More Wind
The Federal Reserve"s decision to raise interest rates Wednesday might create as many problems as it solves, suggests Dr. Irwin Kellner, in his recent CBS Marketwatch column, "Between Scylla and Charybdis," Dr. Kellner makes the point that because job growth has been weak, so has personal income growth, with the result that many have borrowed at adjustable rates that can only rise with the Fed rates. "Lots of this new debt is being used for everyday living expenses, the rest is being used to buy houses," writes Kellner. "Relatively speaking, more people own their own homes today than ever before. This surge in demand has pushed up housing prices much faster than household incomes. In turn this has generated concerns that there is a bubble in housing that will deflate as interest rates go up. Many people could wind up owing more than their house is worth." Rates can"t go up without jobs, says Kellner of the oxymoronic "jobless recovery." And people who are paying more for their debts have less money to spend on houses, which could help put the housing market into the middle of a perfect real estate storm. "The risks seem so obvious that it astounds me that more professionals in the real estate and banking sectors are not expressing worry in public," says Eric Janszen, managing director Osborn Capital LLC. "I know many who do privately, and I have friends that work for investment banks who tell me in confidence that they are very concerned about what they call the "credit bubble."" The credit bubble is an effervescent symptom of something else fizzing in our national psyche, and that is a strong sense of entitlement. We"re a nation of people who feel they should have it all now, regardless of the cost, and we have a lending community willing to give it to us, for as much as we are willing to go into debt. As suggested in earlier installments, Americans are carrying at least 25 percent more debt than they did twenty five years ago, and 40 percent of that debt is now on an adjustable rate, for both credit cards and housing. Further, the ability to leverage more has created a "Star Wars" escalation in demand for luxury, and therefore in housing costs, where buyers insist that even the most modest new homes be outfitted with granite countertops, jetted tubs, and other image-rich accoutrements. Home sizes have doubled over the last two generations, even while families have shrunk by an entire person (3.14 persons in 1970 VS 2.62 in 2000, according to the U.S. Census.) Who"s paying for these McMansions, and what will happen to them if energy costs or job losses makes such large homes unsustainable? New economy thinking has shifted from the stock market to housing. Both take a herd mentality for any investment to pay off. It takes a herd to stampede an investment to rise in a profitless company, for example, or to make money shorting just before a sell-off. But unlike stocks, where every dollar invested is one"s own dollar, and a $100 investment buys exactly $100 worth of stock, housing investments are all about leverage with other people"s money. Not only can you make money selling real estate, but you can declare a home your homestead, live in it and sell it after only two years and avoid paying capital gains up to certain amounts. What other investment in America allows tax-free gains? Real estate investor Dolf de Roos makes the point in his book "101 Ways to Massively Increase The Value of Your Real Estate without Spending Much Money," that unlike stock investments which are at the mercy of corporate leaders to grow in value, you can improve real estate and make it worth even more than what you paid for it. "If you have $100,000 cash to invest, how many dollars worth of real estate can you buy? The answer is more like $1 million, as you can easily get bank financing to fund the acquisition," says de Roos. Relaxed credit guidelines, including a proliferation in adjustable rate, interest-only, and other easy-to-get loans, has helped put over 68 percent of the population into homes of their own as well as fueled speculative real estate acquisition. "I agree that there is a widely held false belief that one"s home can be counted on to consistently deliver cash in the form of cheap loans on an ever increasing nominal value which is perceived as permanently accumulated equity," cautions Janszen. "This reminds me of the arguments I used to hear from New Era stock adherents during the stock market bubble that in the long run their stocks could only go up (Click here for more info) even though many of the companies they invested in were destined to go out of business. They probably do not want to know that real estate in Japan is still on average 50 percent below peaks of 1992, as housing prices continued to climb for several years in a low interest rate environment after their stock bubble popped in 1990... sound familiar? "Ignorance of real estate risks are so widespread," worries Janszen, "I have determined that while nearly all of my friends understand the difference between stocks and mutual funds and index funds and bonds and various asset classes, most do not understand the difference between debt and credit (e.g., debt is the result of a credit transaction, the other kind of transaction is cash, credit is a lien on future labor, etc.), savings and investment, and so on. The source of this misinformation is clearly the banks that need to sell these loans and could not do so as readily if consumers understood the risks."RES Course Provider commented:
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06.04.2012