In January 2006, I wrote an article giving the future path of the housing market. It mapped out the pros and cons of buying a home at that time and the future pitfalls if no caution was taken. Alas, it was not published by any mainstream editor who read it. A few replied to me saying they thought the warnings in my article was not going to happen and the article was not born out by the housing market sales. As a reminder of what was written I have enclosed the article for today's readers. Rather than being a vision of the future, now it is an enfolding history in the making.
The Housing Cartel
History has taught us that cartels do not work when they try to manipulate a commodity or product to extreme values. There has been many examples of syndicated maneuvering and one that springs to mind out of many is the silver debacle in the eighties. The influential Bunker-Hunt family tried to corner the market for silver with disastrous results.
In today's world there has grown a very large and very unsuspecting cartel.
Who is it you may ask?
Well, it may be you, ... yes, you, the person that is reading this article.
Do you own your own home? You do! Why then, you may be part of a world cartel that has unwittingly manipulated the price of private property beyond the extreme at this moment in time. The evidence is all to clear and unfortunately the results may be disastrous for many families caught in the net, who bought too late in the game.
If property owners could just keep swapping houses amongst themselves and pocket the profits all would be well. But ... there is a very big 'But' ... there is a significant proportion of the population that does not own property and they are on the outside looking in...The trouble is, they cannot afford to get into the housing markets...there is no room at the inn (to get in). Therefore they have to rent.
The first sign of trouble begins when rental values start to fall because renters just cannot afford large increases in rent. This has begun in many coastal towns and it will not be long before the decline in rents are transported to big cities.
Because the stock market did not produced good returns since March 2000 until the end of October 2002, and interest rates were low, many people invested in buy to rent. The barber and the taxi driver stopped tipping shares and started to invest in rental properties. This has fueled an increase in prices that cannot be maintained and the speculators who bought on large mortgages will collapse just like those who margined dot coms.
The second sign of pending disaster is first time buyers who did manage to get a low priced mortgage have stretched themselves to breaking point. Many others have 125% mortgages and extended credit card debt. Home property taxes are on the increase due to higher property values. When house prices start their decline negative equity will mean many bank repossessions flooding the market. More supply ... less demand = lower prices.
And thirdly, to cap it all, interest rates are still on the way up. Rates have risen in the UK and Australia and in the US there have been fourteen rate hikes. At least two more are expected. Economies around the world are rising and the economy in America is still growing at a fair clip! It may be short lived, but it will show good growth over the next six months. Even though the government figures may not tell the true picture, company earning do show strong growth and will continue strong throughout 2006.
The stock market has boiled upwards in double quick time since December 05, to over Dow 11,000 and the S &P is at record levels. At the same time, house prices are beginning to falter. The smart people who earn money in the stock market don't look at Dow Jones index as a guide. They just know to buy low and when sell high... When to hold and when to fold.
As interest rates rise in the USA people who own homes with large mortgages will begin to feel the pain. The rush to the exit may be bad news for any banks whose customers are mortgaged to the hilt (big debts are never a good idea).
Cartels always come to an end eventually (come to think of it, nothing lasts forever in the physical world). The high priced housing cartels fate is blowing on the winds of an economic housing boom that has been orchestrated to give artificial signals of prosperity fueled (or should it be fooled) by more debt...so we have a cartel brought down by bigger manipulations of economic statistics...good game...good game. If you can catch a falling star, before it falls and put it in your pocket, you may be one of the few home owners that will be ahead in this housing cartels game. But then again, if you own your home with little or no debt and are not thinking of moving, it does not matter. Just enjoy your home and forget about the prices.
Of course, I could be wrong and the housing market may continue to go up for many more years. This article is written just to point out the possible dangers that may lie ahead for the people who speculate in house prices and as the saying goes ... Forewarned is forearmed. Since most people do not move house too regularly and everyone need a place to live, the housing cartel will continue to be the best investment for the private person....So, the bottom line is don't get into too much debt with your mortgage and pay it off just as soon as possible. Your home will always be your castle and it should not be used for speculations. After all is said and done, all financial transactions carry risks........
Let the buyer Be-Aware!
So there you have it, looking in the rear view mirror of a vision that is unfolding now. Inflation fears will keep the Fed from cutting interest rates and house price may keep falling well into 2008. Maybe it is time to batten down the hatches and buy Government notes and bills with any spare cash? A 4.5% return may seem like manna from Heaven by years end.
Michael Levy is an Author, Poet, Motivational/Financial Speaker. More about his work can be seen at PointOfLife.com