This Time Its Different

[padawan]

Not sure if this has been posted yet but its an interesting article.

http://www.kitco.com/ind/Schiff/nov182005.html

Quote,

"The bubble mentality

The speculative mentality that has enveloped homebuyers has so clouded their judgments that they will pay any price for real estate, which is not only seen as a “can’t lose” investment, but thanks to incredible leverage, the equivalent of a “ticket to easy street.” With houses now regarded as sources of income rather then expenses, many people see no cost to homeownership. If a typical homebuyer in Southern California expects a $500,000 condo to appreciate by $100,000 per year, does he care if the $2,000 monthly mortgage payment consumes half of his salary? Of course not, as the anticipation of extracting an extra $100,000 per year in tax-free income means the house is expected to add to, rather than subtract from monthly income. In fact, with home ownership now perceived to be more lucrative than employment, is it any wonder that potential homebuyers will pay outrageous prices, and say or do anything to qualify for mortgages?"

"The Bubble Economy

Contributing to the housing mania is the artificial boost to consumer spending (80% U.S. GDP,) the bubble itself has produced. This acts as a self-perpetuating, “virtuous” circle where increased consumer spending drives housing prices higher, which in turn provides the impetus for still more consumer spending. Through the wealth effect, growing home equity both increases the willingness of homeowners to spend while reducing their perceived need to save."

"Conclusion

In the final analysis the temporary factors artificially elevating real estate prices will subside. Rising interest rates and inflation, and a resumption of savings as home equity fades, will combine to suppress consumer spending, leading to recession, job losses, and reduced demand for housing. The supply of unsold houses will continue to rise as higher interest rates, tighter lending standards, and higher down payments price more potential buyers out of the market. Without the expectation of routine cash-out refinancing, homebuyers will no longer be willing to devote staggering percentages of their incomes to mortgage payments. In addition, the expectation of lower prices will bring more sellers to the market, just as buyers are backing away."