It is said a persons home
is their castle. For sure, over many years, a home can be one of the
best investments as well as a place of joyful entertaining, rest and
shelter. There are always high and low points in any market ... If the
main reason to buy a home is for a family to live in it for a reasonable
number of years, the timing may not matter too much. However, in this
present housing slump caution is the key word for all buyers, for nobody
knows how long and how hard the house prices will decline. Why is it
different this time around and what has caused it to be so?
There are a number of factors why many people are going to face
financial ruin. Although many innocent people have been caught up in a
net of financial shenanigans, there may be some help in sight for them
from the banks with government assistance. Be that as it may, a lot of
monetary difficulty has been brought about by speculative greed,
gambling in home flipping ... also by banks looking for larger profits
without understanding what an abyss of darkness they were getting into.
Accordingly, let's explore some of the obvious and less apparent reasons
why property speculation is a far riskier business than most people
realize. And why it will lead many spectators into the poor house over
the next few years.
Over the past six years house prices went on a wild ride of excessive
exuberance. People looking for easy money were attending seminars on how
to buy and sell houses for a profit and it seemed everyone and their
neighbor wanted a piece of the action. Buying fixer-uppers or new houses
and apartments that could be bought directly from the contractor, then
flipped when completed seemed a very lucrative deal. At the same time
builders bought plots of land and built houses in the hopes the boom
would continue to expand.
At the same time mortgages became incredibly easy to obtain with no
money down and very little interest for a couple of years. Every
sensible business person knows this type of dealing in property will end
in ruin, so why did so many speculators get caught out and what can they
do now ... The simple answer is, get out now even if it means a loss,
because the longer they hold on the bigger the loss will be for many
years to come.
Why is it foolhardy for speculators to hang on and hope the market will
turn round again soon? The situation may change sometime in the future,
but at this point in time here are a few reasons why the first loss will
be the best loss for existing housing speculators.
• The inventory levels in most areas of the USA are building far faster
than the sales.
• Higher interest rates are kicking-in to the contracts that had a
couple of years of lower rates.
• Even if a home owner wants to move to a new location they first need
to find a buyer for their existing home and that is no easy task.
• Many companies are downsizing especially in the financial sector and
the unemployment rate is set to rise.
• Inflation in food and fuel continues to rise giving people less money
to spend and making it harder to save.
• Money is tight and banks no longer have the capacity or the means to
give mortgages to any Tom, Dick or Jane.
• Home prices peaked in 2006 in most places and the normal cycle of peak
and trough has begun a new downturn. With so much speculation and cheap
money of the past, many people will face insolvency despite government
actions to try stemming the downward tide of despair.
• The speculators who are holding on to homes hoping to sell them face
daily losses because they now own a depreciating liability.
Why is a speculative home purchase such a depreciating liability rather
that an appreciating asset?
1. The property needs to be insured.
2. The property needs maintenance.
3. Property taxes need to be paid.
4. Heating and air conditioning bills need to be paid.
5. If there is a loan on the property of let's say 6% on a cost of
$400,000 that is costing the holder $24,000 a year.
6. Likewise, the lack of a sale is costing the holder around $24,000 in
interest they could get in a fairly safe closed end mutual fund that
yields 6% tax paid.
To sum up the financial catastrophe; a loss of interest by having no
sale, paying interest on a loan, adding up all the expenses, the total
cost on a $400,000 property may cost the speculator as much as $50,000 a
year. Not too many people calculate there holding cost in this manner
and that is why they go broke faster that they expected.
If speculators and builders lower their prices to a level that will
guarantee a sale right now, they may save a bigger disaster in the fall.
What seems to be a below appraisal price right now may turn out to be an
even lower valuation by the fall. Lowering prices more than appraisal
now may also stimulate interest in buyers who have been holding back
looking for a bargain and thus lessen the build up in home inventory.
Consequently, just as the stock market crashes when everyone goes to the
exit at the same time, so might it be with the housing market. If by
mid-summer prices have not stopped falling and speculators have been
holding on in the hopes of a sale, many may try to pull out at the same
time as they view their declining bank balance. As with all
speculations, be it stock market, commodities, or housing, the majority
of inexperienced players, after many small gains, eventually face
financial collapse as panic sets in.
The government will help out some home owners and banks may help them
stay in their homes. However nobody will come to the aid of the
speculators who are holding on in hope someone will take their financial
problems away. The best advice for the youth of today is, learn from
this current lesson in ruinous greed, do not get into debt and if you
need to take out a mortgage pay it off ASAP.
Remember the lines from, Charles Dickens novel; Pickwick Papers ...
Total income one pound, expenditure nineteen and sixpence, result
happiness.
Total income one pound, expenditure one pound and sixpence, result
misery.
April 6,
2008
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Ramblings
Read Also:
Let The Home Buyer Be
Aware by Michael Levy
By arrangement with
PointofLife
