My neighbor has had his beach condo on the market for two months. They have not had one nibble. Why? Most consumers have been priced out of the market. In fact, consumers are cancelling their orders for new homes as we speak.
Now don't get too eager to begin buying, the decline is just now getting under way. In May 2005, I wrote:
May 14, 2005
The stock market hasn稚 been any fun, has it? Why don稚 we stop frustrating ourselves and invest in real estate instead. Gee, everyone痴 making money in real estate. I知 sure you have heard more than 1 person over the past month brag about the killing they池e making in real estate. The last time I heard this kind of bragging was during the 1999 NASDAQ bubble. This is very alarming.
Today, consumers are leveraged to the hilt by high credit card balances, home equity loans, second mortgages and home mortgages. In fact, the nonchalant attitudes and financial decay we are witnessing today can be likened to the same attitudes of investors during the roaring twenties. Of course, the stock market crash of 1929 was similar in many ways to the NASDAQ crash a few years ago. Like 1929, buying on margin allowed average investors (gamblers) to buy more stock than they could afford to lose.
In the same respect, many real estate investors (gamblers) are pledging 20% letters of credit toward real estate that they have no intentions of closing on. If interest rates spiked and real estate prices began to plunge, real estate speculators would go belly up, and banks would be stuck with massive amounts of inflated real estate.
So, what does that have to do with us? You池e right; we池e not dumb enough to get ourselves involved in another over inflated bubble, are we? No way! Once is enough. The reason I make reference to real estate is our lovable Fed chief is determined to squash inflation, and almost every inflationary pressure we are witnessing is coming from higher commodity prices. If the demand for housing can be slowed, commodity prices would decline, and inflation fears would subside.
The Real Estate Correction
Like the investors during the NASDAQ bubble, real estate investors are ignoring the warning shot fired across their bow by the Fed. Just this morning CNBC had a squawk back question that said, 展hat do you think is a better investment, real estate or stocks�. Everyone is talking about real estate. Even Donald Trump is cashing in on his real estate luck by selling very poorly written 塗ow I got rich� books. Even his sidekicks on the Apprentice, Carolyn and George are cashing in with books of their own.
Recently, Donald Trump was just paid $1 million to give a 45-minute talk on getting rich in real estate to 40,000 suckers. Once the real estate bubble bursts, the only person in the room that got richer was Trump. Today, everyone wants to own real estate or become a real estate broker. In 1999, everyone wanted to be a stockbroker, or own stocks.
The bottom- line in this soon to be cautionary tale is investors become gamblers when they start to make a lot of money. The prudent principles of investing are thrown completely out the window when paper profits begin to exceed person痴 wildest expectations. The sure way to spot a top in any market is to watch and listen to the investors in that market. When investors become selfish, egotistical, and fully of crap, its time to run for the exits.
