Tuesday, 6 April 2010

Buying food is throwing your money away

According to the Telegraph, UK house prices face a prolonged bear market.
Bear market? See, that's the whole problem. Houses aren't financial instruments. They're not even assets, for Christ's sake - they're places to live. What was ever wrong with renting, anyway?
I still hear the argument that renting is "throwing your money away." Who made this one up, and what were they on? I guess buying food is throwing your money away, too, right? You could have bought some tech stocks instead and got rich!
People say that mortgage payments are the same as rent, so you might as well be buying more and more of it each month, instead of none. Incorrect, for four reasons.
Firstly, mortgage payments are almost always higher than rent payments.
Secondly, as an owner you have to pay: property taxes, maintenance (repairs, utilities replacement, etc), permits, council tax, stamp duty, licences, etc.
Thirdly, you are paying interest on the mortgage to the lender.
Fourth, what if the house stops gaining value on the market? What if it falls, and you end up owing more than the house is worth, with interest rates at sky-high levels? You are screwed, and you will lose the house, and be worse off than if you had been renting all along.

It's pretty clear that real estate is due a fall of around 90% at some point. It's proven remarkably difficult to forecast the timing of the adjustments. In 2003 the Economist magazine was already calling the housing bubble the largest of all time. And then prices continued rising, doubling or even tripling for another five years.
Then they started to pop, and stimulus money arrested it.
But not for long, this time, I think. When the dam bursts, there will be a dollar crisis, followed by inflation, sky-rocketing interest rates, a flood of foreclosures, ghost towns, and nobody will be able to sell their houses anymore. It will be accompanied by the popping of the commercial real estate bubble, of course, which has also started to become apparent, as I've shown in earlier posts.
Naturally mortgage lenders will implode in the hundreds, there will be more cries for bailouts, but the government has no more money.
Then they'll take us to war. There will be riots, and the police and military will be called out to deal with those involved. Lots of deaths.
What can we do? Buy gold. Have an escape route in mind. Spread information any way you can. Get in shape.

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