I think my advice is pretty clear, DC. We are no longer living in a time in which you can have it all.
I realize thousands of San Diegans love their homes, have lovely families in those homes and have good jobs. My advice is to prepare. “Renting” is obviously anathema to you, but are you telling me that downsizing is not an option? You don’t have to take your kids out of school or leave your job. There’s no need to take such drastic action. But are you really so wed to a plot of land and four walls that you wouldn’t be able to part ways with it and live in another abode to weather a coming storm? For most of mankind’s history a house served as shelter; now it has become shelter, investment, retirement, ATM and a conspicuous display of status. That’s simply not healthy.
That said, it is absolutely critical to realizethat the lifestyle we have built as Americans over the past 30 years is quickly coming to an end. The housing bubble is just the tip of an enormous iceberg. It is a lifestyle that has been built on faux wealth (inflated home prices), faux productivity (eliminating well-paying jobs and hiring independent contractors and consultants w/o benefits) and faux income (credit cards).
So you think rates won’t skyrocket? On what do you base this assertion? We have amassed a level of debt (as a nation and as individual consumers) that simply cannot be sustained. For the first time in our nation’s history we have a negative savings rate. The average American household (per a CNN survey) has NINETEEN credit cards. People are routinely using credit to purchase food and gas. Our debt is simply unsustainable. And THAT is why interest rates will and must skyrocket. The party is over, and we partied way too long. The thing about this party is that the longer it went on, the more trash we created, so the longer it’s going to take to pick the crap up.
If you think for a nanosecond that the real estate boom we have experienced would have existed if interest rates where anywhere near their pre-2000 levels, you are sorely mistaken. My parents bought their first and second homes (between 1970 and 1980) at 10 – 18%. I bought my first condo in 1991 at 9-1/2%. Interest rates have historically been much higher than they have been for the past 6 years. Would you buy a $750K house at 9-1/2%? Would you? I want you to ask yourself this question, because as you cling to the vestiges of your So Cal dream and hang onto your faux wealth, you will have to find some sucker who is willing to do this.
What we have done is attempt to duck a recession by artificially lowering rates. But you can’t cheat the laws of economics for long. Like death, eventually they will come to claim you. Sadly, our need to have it all and keep the party going means that what might have been only a recession may now erupt until a full-blown depression.
DC, you simply can’t continue to borrow $57 billion a day from foreign investors and expect that there won’t be severe repercussions for the economy. We are finally witnessing those repercussions. Interest rates must rise — to continue to attract foreign investment in our dollars — but that will kill the stock market (notice how we’re seeing 200+ market swings based on the mere speculation of a possible rate hike?) Conversely, if we don’t raise rates, the dollar will continue to fall, in which case foreigners will eventually start dumping their dollar reserves. Either way, it spells doom for you and me. Why do you think Bernanke is agonizing over this? Because he knows he faces a choice between Scylla and Charybdis. Death by fire or death by ice.
And do you honestly think $3.50/gallon gas won’t be a factor in this unfolding saga? Do you really think gas is going below $3 — ever?? We are at or nearing peak oil — so prepare yourself for $100/barrel oil in the near future. And yes, that will affect homebuyers and homeowners in San Diego, too. Because every penny you put into your tank means one less penny toward your mortgage.
One good hurricane? Another well-timed terrorist attack? Can you really factor these things into the history you seem to be relying on? I think not, because there IS no historical precedent for the uncharterd waters we find ourselves in now.
And speaking of history, does it really tell us that home prices — no matter how high — will simply dip a little, then stabilize? What happened to San Diego — or most of So Cal — in the early 90s? I recall that prices did plunge and took years to recover. Are we conveniently ignoring this piece of history? And by the way, as per my earlier post, we didn’t face half the crap in the 90s that we are looking at now. Compared to the crap storm brewing in 2006, the early 90s seemed like a night at Studio 54 in retrospect.
And here’s one more thing to wrap your mind around: as of March of this year, Iran is now selling its prodigious oil reserves in EUROS. That’s right. They are dumping the dollar. And other countries — Venezuela, Bolivia for starters — are following suit. And Russia just opened its oil bourse in rubles last month. What does this mean for San Diego? I will spell it out. It means a lower demand for dollars, which means higher interest rates on the gazillion dollars of debt we have accumulated, which means homebuyers will think twice about buying $750K at 9-1/2%, which means your coveted market with fabulous weather will be hit with price reductions like you can’t even imagine.
So you want me to clarify my advice? My advice is to get real fast and stop dreaming. Your life is about to change. My life is about to change. I hardly think by posting on an obscure board, I am giving an open call to 950,000 residents of San Diego to dump their real estate. I think most of us head to these boards so we can share information to stay one step ahead of the herd. There will be victims in any collapse. Maybe I’m wrong, but isn’t the point of this exercise that the victim NOT be you?
He who fights, then runs away lives to fight another day. I’m not by a longshot suggesting you never return to real estate. I am simply advising to take your equity while it is still there, then pounce on the bargains that will inevitably present themselves when the factors I listed in my last post come into serious play.
But know this: before you make your long-term plans, realize that the housing market is simply one part of a much bigger play with many moving parts. You can’t fully understand where this market is heading without a full appreciation of the marcoeconomic forces in the background.
And if I am wrong and you have so much faith in the intrinsic value of your house, then stay put and hang on. I’ll check with you in 6 mos and we’ll see whose advice was better.
