A home is not an investment instrument and definitely not a speculative instrument. Years back, we pay 10% interest rate on our mortgages. However, when interest rates fell to record low of 3%, 4% 5%, one can afford twice the home for the same payment. So everyone traded up. Why not and nothing wrong with it. Hpwever, what went wrong was because everyone got greedy are started buying homes or even “investment” houses to flip and things went on a rampage. None of these people have any kind of investment training or experience. Worse, they drove prices higher and a lot faster than earnings. Over night, all these how to get rich quick real estate courses sprung up. When interest rates goes up, payments just got higher and real estate prices come down. This is the law of real estate. The result is quite predictable. There will be a correction. I am hoping for a soft landing instead of a crash. Just stay put and don’t get into the “me too” kind of a deal right now.

The Fed is done raising interest rates and ultimately will have to lower interest rates in order to restimulate an asset based/housing led economy that has been its primary growth hormone in recent years. With inflation leveling off at admittedly unacceptable levels and the domestic economy moving towards a 2% real growth rate or less in the next year or so, the Fed at some point in 2007 will be forced to cut short rates. Don’t ask me when or by how much. A lot will depend on the evolution of the domestic housing market and the equally important maturation of the global economy sans U.S. consumer imports and perhaps sans hyper investment spending in Asia.

Although I explain what is going to happen with the market and that it won’t crash, I feel the need to put things a bit simpler. If I’m wrong (I’m not) and things get bad in the housing market, things will get bad for everyone. Jobs will go away, especially in manufacturing, as well as perhaps services industries. It won’t just be the speculators that are hurting, it will be you too.

There are multiple factors to the crazy housing prices.
1. People are just plain stupid and willing to pay crazy prices (face it…houses wouldn’t sell for so high if there weren’t idiots willing to pay) and go into crazy debt to pay for it.
2. Lot’s of people “investing” in real estate.
3. VERY low interest rates and lots of non traditional mortgages that make a half million dollar mortgage “affordable” for a fixed amount of time.
4. The misguided belief that houses were just going to keep on going up forever.

etc, etc..

The good news is that things are definitely slowing down. I’m starting to read little articles here and there that are getting the doom and gloom rolling. It’s funny because a few months ago everyone insisted that everything was just peachy–the bubble is just a myth! Ah, how quickly things change. Houses are staying on the market much longer. People are giving low ball offers instead of trying to trump someone else’s offer. People are taking their houses off the market because they can’t get what they’re asking. We are also just beginning to see people defaulting on their loans. Shame on these lenders who lend HUGE amounts of money to people who can’t really afford it.

So anyway, I think things are starting to happen. Chin up.

Just save your money and you will be able to buy a house someday. You only need like 5% down or less. You might have to move out of town a bit, but it’s doable. Better this way, than your way!