Fast Track to the Speculative Poor House by Michael Levy SignUp
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Fast Track to the Speculative Poor House
by Michael Levy Bookmark and Share
 
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.
6-Apr-2008
More by :  Michael Levy
 
Views: 1325
 
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