Tuesday, September 30, 2008

The future of real estate and investing

The future of real estate, article by Australian real estate watch dog Neil Jenman.
Neil is a voice I listened to from a few years back, because he was one of the few saying, against a howl of protests, than a real estate crash was coming. Boy, was he right, and I'm sitting tight, I won't buy a house until this crash bottoms out. (Will take a couple of years.)
"That's the trouble with you young people today," he said. "You think the world revolves around you. It doesn't. We don't need you to buy real estate, mate. We've got investors. And they know real estate will never come down. It's because they're not making any more of it, mate."

Here is the Time article he refers to, about the broader financial issues happening now.
"If you're having a little trouble coping with what seems to be the complete unraveling of the world's financial system, you needn't feel bad about yourself. It's horribly confusing, not to say terrifying; even people like us, with a combined 65 years of writing about business, have never seen anything like what's going on."

The funny thing is that I read an article a couple of years ago about about how "Fanny May" and "Freddie Mac" were set up for a big fall. This was on the Motley Fool web site! It does not get more basic than that, and yet the situation seems to have taken all the bigwigs by surprise. Maybe they should all read Motley Fool.

"There was little fear of buying a house with nothing down, because housing prices, we were assured, only go up. And there was no fear of making mortgage loans, because what analysts call "house-price appreciation" would increase the value of the collateral if borrowers couldn't or wouldn't pay. The idea that we'd have house-price depreciation — average house prices in the top 20 markets are down 15%, according to the S&P Case-Shiller index — never entered into the equation."

No, because last time it happened was aaaaaages ago, like in the eighties! Who can remember that!?

I'm reminded of the film Wall Street, which was pretty much about the last time things went south (no, wait, that would be about seven years ago). In the end, the Martin Sheen character says to the Charlie Sheen character, after it all has gone to sh... sheen... "how about getting into a line of work where you actually contribute to society... you know, produce something."

"Didn't the folks on Wall Street, who are nothing if not smart, know that someday the music would end? Sure. But they couldn't help behaving the way they did because of Wall Street's classic business model, which works like a dream for Wall Street employees (during good times) but can be a nightmare for the customers. Here's how it goes. You bet big with someone else's money. If you win, you get a huge bonus, based on the profits. If you lose, you lose someone else's money rather than your own, and you move on to the next job. If you're especially smart — like Lehman chief executive Dick Fuld — you take a lot of money off the table."
"Coping in this new world will require adjustments by millions of Americans. We all will have to start living within our means — or preferably below them. If you don't overborrow or overspend, you're far less vulnerable to whatever problems the financial system may have."

One thing I don't get: will many savers (as opposed to investors) actually lose their savings because of this whole debacle? This aspect has not been addressed in the many articles I've read about it. This to me would be the big injustice. You're supposed to be aware that if you buy stock, you take risk, but if you stay in "cash" (savings), you're always told it's totally safe.

Anyway... a little more introspection: it's easy for me being judgmental about all this, but we all have our addictions, battling our inner pain. Overspending is not one of mine, but junk food is. If I ever get a heart attack, somebody would be equally justified in saying to me: "you didn't see it coming?"


Monsieur Beep! said...

"...something we've never seen before..." as it says somewhere in the text. Yes, our market/capitalism system gives you a few surprises now and then, the system is of the volatile kind. I'm "happy" with the present state of things, as it's part of a functioning market system and won't last forever. My assets also lost value, but they'll appreciate again sooner or later. In a socialistic system "you see always the same boring things (potatoes and a few stinking trabbi cars)". Nothing ever changes, there's hardly any innovation. So isn't it fascinating to see something you've never seen??

Eo, here in Germany your savings are protected by a certain type of insurance: (Einlagensicherungsfonds-YourSavingsAre Secure), of which all the banks are a member. I don't know about other contries, where it might be handled differently.

Eolake Stobblehouse said...

Last year they had an actual *run* on a bank, "Northern Rock". Shocked everybody. It quieted down when the gov stepped in and said they'd guarantee everything.

I think that would happen in almost every case. But they only guarantee up to 35k sterling though.

I think the German system sounds great. But one could imagine a failure so big the insurance system couldn't handle it. That's part of what's happening in the US now.