Death of the $30,000 millionaire

[Welsh_Dragon]

Huge credit crunch is coming. I believe the death knell has been sounded. Forget your FICO. Cash in the bank and/or a big base salary is now required (read: INTELLIGENCE REQUIRED). No more loans for an Escalate on a Barista salary. No more HELOC and 100+% home equity financing. No more people living like a king on $30k. Welcome to 2008. Loving it.

http://blogs.marketwatch.com/greenberg/ ... an-insider

"How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible."

[Twitchy]

I can't say I saw this coming in the form that it took but when I saw all of my friends who don't make as much as me buying bigger homes than me with these crazy ARM loans and joking about their credit card debt, I knew housing prices would HAVE to drop.

They all thought I was crazy when I sold my house in Southlake and moved to an apartment downtown, pulled out of many of my investments and put all of my cash in the bank.

Now they are all trying to trade in their expensive cars or sell their second cars and they can't go out because they can't afford to. I have been making investments as the stock market sinks.

Death to the $30,000 millionaire!

[Westfall]

Money always flows from the impatient to the patient.

It is the nature of bubbles to draw in more and more fools as the price of an underlying asset/investment increases in price. Our pyschological biases betray us in the form of fear of missing out or a herd mentality.

This culture of conspicious over-consumption is a plague that infects our society. America consumes 4% more than we produce. This results in a trade deficit that if not corrected, will destroy our nation.

Westfall

[Vector]

At a minimum, it will destroy our currency...

Time to buy gold, or other currency-like assets. Oil anyone?

[Westfall]

At a minimum, it will destroy our currency...

Time to buy gold, or other currency-like assets. Oil anyone?

Though I agree with your thinking I recomend strongly against buying both Gold and Oil. Gold has almost no intrinsic value or utility--it does not produce anything. A block of gold purchased today will be the same block of gold in 20 years. Of course you'll have to pay someone to store/gaurd your gold.

As to oil, Technological advancements are occuring at such a rate that someday *soon*, we won't need oil. As an engineer, I am facinated by the emerging technologies in this area. Once rechargable car batteries become viable enough reach scalablity, it will spawn a virtuious cycle that will drive people to electric vehicles. Then the main "driving" factor behind demand for oil will drop of quite quickly.

W. Buffett gave a speech conserning this very problem:

A perpetuation of this transfer (trade deficit) will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo--but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off--or simply service--the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat--they have nothing left to trade--but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

Westfall

[Welsh_Dragon]

Nice quote Westfall - from the Oracle himself. What people don't realize here is that the banks will end up owning a lot of valuable property. Once they are done writing everything down to nothing things will get interesting. Squeeze the masses is always the plan.

The $30k millionaire is still screwed either way.

“‘You’re not going to get a big bounce back with housing,’ said Edward Leamer, economist with the Anderson Forecast. ‘What we’ve done is increased the value of our land about $5 trillion (nationally). We think we’re wealthier than we really are.’”

Think we're wealthier than we are eh. Now who does that sound like?

[flash07]

i would agree with you except for the fact that real estate is one of if not the most sound investment. Quite a few markets saw rapid inflation Cali New York New Jersey and Miami to name a few. All of these areas have seen sky high pricing in real estate which the balloon will pop. That is just a matter of time but real estate will always be profitable. You just better hope you are sitting on it while it pops instead of buying right before.

"buy land. theyve stopped making it" Mark Twain


Flash

[Smirks]

Real Estate Market fluctuation trends don't necessarily affect/include the DFW area...hell even all of Texas. Our market has always been quite separate from the trends of California and any other popular real estate investment bubble.

I'm no realtor or investor...just a guy who did the admin work for a real estate company for 2.5 years : ) I see the #'s not the sales pitches and the motivational sales meetings.

[Welsh_Dragon]

Real Estate Market fluctuation trends don't necessarily affect/include the DFW area...hell even all of Texas. Our market has always been quite separate from the trends of California and any other popular real estate investment bubble.

I'm no realtor or investor...just a guy who did the admin work for a real estate company for 2.5 years : ) I see the #'s not the sales pitches and the motivational sales meetings.

I agree with your point. In my opinion well located Dallas real estate will outperform the national market. I own property here and this was one of the driving factors behind the purchase. Dallas area property values have trailed inflation for DECADES. Houses are very affordable here priced under $100 per sqft in all but close in upscale areas. Strong job market. Should tread water for a while then head up in a sensible way assuming we don't see a depression.

The fact still remains that credit will never be as easy to get. The $30k millionaire is still screwed regardless (as per the topic of this thread).

[Westfall]

i would agree with you except for the fact that real estate is one of if not the most sound investment.... That is just a matter of time but real estate will always be profitable. You just better hope you are sitting on it while it pops instead of buying right before.

I disagree with this. Real Estate is a commotity. The value of a piece of real estate is equal to the value of the sum of all rents that property could generate. The price may be higher or lower than this value.

Real estate is NOT a superior investment to stocks.

Shares of businesses return 7% a year over long periods. I'm subtracting for inflation (After-inflation, or "real," returns are the only ones that matter.)

The average real return for houses over long periods might surprise you: It's virtually zero.

Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents.

House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase over long periods at the rate of inflation, for a real return of zero.

Westfall