Thursday, June 02, 2005
Despite the best efforts of the Federal Reserve in their recent campaign to sound the alarm about potential problems with today's real estate market and lending practices, it may all be just wasted breath. They are up against a force much more powerful than even they can imagine - Money Magazine.
The June "Your Home" special issue of Money Magazine is a powerful tour de force in mainstream financial media propaganda - something that everyone should study carefully then place in a baggie and store in a safe place. Many years from now, they can show their grandchildren and great grandchildren.
Fortunately for our purposes here, most of the articles in this issue are available online - today we take a closer look.
Zell: No Bubble Here
Setting the tone for what is to follow, as if to first cleanse the palate, an unabashadely bullish condo-converter clears the air about all this housing bubble nonsense.
A bubble by definition goes poof -- the way so many tech stocks did in 2000 -- and there's no value left.OK, Zell, pick up a newspaper - the definition of "bubble" is being stretched so we don't have to call it the housing "balloon".
Worst-case scenario? A flat housing market. Look, all I can tell you is we're the largest owner of apartments in the U.S. and among the largest converters of apartments to condos. If there was a danger of a bubble, would we be in this business?If there was a danger of a bubble would I be stupid enough to tell you? I've got overpriced condo conversions I'm trying to unload.
Sivy on Real Estate - Confessions of a Market Timer
I've read Sivy on stocks, why must Sivy also be on real estate?
"... why not sell when prices are high and invest the money ... I got such an opportunity six and a half years ago, when I decided to sell my co-op apartment because I thought Manhattan real estate prices were close to a peak."You sold in 1998. No one should listen to anything you have to say ... ever.
This is, without a doubt, the signature article for this issue and perhaps for the entire early 21st century housing mania - the smiling Rothschilds grace the cover, and though they may not realize it, they may be immortalized for this appearance on the cover, so near the peak of the bubble. Providing excerpts from this masterpiece really does not do it justice - it must be read in its entirety, preferably with a stiff drink and some powerful sedatives.
Here is some advice for the people interviewed:
- Kelly Pearson - Yes, the possibilities in San Diego are unreal. Things that are unreal have a way of becoming real, sometimes real fast.
- Manuel and Eva Altamirano - Leave your equity alone. If it will help, convert $10,000 of your home equity into $1 bills. Whenever you get the urge to roll over your equity, get out all the $1 bills, spread them all over your bedroom, and roll around in them.
- Ryan and Laura Rothschild (pictured on the cover) - You spent $850,000 upgrading your home - someday, you may wish you had the $850,000 and the pile of dirt, instead of the ceiling beams and the lovely garden.
- Angie and Ted Carter-Donovan - Ted, you better get control of that wife of yours - now everyone thinks your last name is hyphenated.
- Michael and Cheryl Roberts - Wow! Five people in 2650 square feet - you poor things! You're only up $1.4 million and you don't like the $6 million tear down - life just isn't fair.
- Jerry and Laura Satran - There for a minute, it looked like this might end on a somber note. Well, actually ... if you consider how many condo conversion down payments you could squeeze out of that extra $100,000 they didn't get, that is kind of sad.
OK, one quote. This piece includes what has to be one of the best housing bubble rationalizations ever:
These days, everybody knows someone who has made money in real estate, and rising prices have become a national preoccupation. We are a wealthier country than we have ever been, so it makes sense that we would spend more on real estate, pushing prices to new highs.Somebody, get me a bucket!
Are Home Prices Really So Crazy?
This argument, wholly unsound as it is, appears with greater frequency as the weeks go by. The clear message is that you've got lots of time - think how many houses you can buy and sell in three years.
After all, Federal Reserve chief Alan Greenspan complained of "irrational exuberance" in 1996, more than three years before the stock boom ended in tears.Just when it looked like they were starting to give some good advice, out comes this subterfuge:
"We normally recommend getting as much of a line of credit as you can, but then to sit on it," says Mark Gleason, a Burbank, Calif. financial planner.You see, they may say "sit on it", "fund college", and "vacation home", but when the neighbors are driving their Hummers to Arizona to buy investment property, good intentions can quickly be forgotten - once the paperwork is signed, that $200,000 line of credit starts calling like a lonely sea maiden on a rocky coast, luring the unwitting sailor closer to shore.
That's not to say you can't use your home's value to improve your and your children's standard of living. Most planners say using equity to help fund college is a reasonable choice.
And about 12 percent of readers in our survey said they were using cash from their equity to buy other real estate. This too can make sense -- a vacation home is something you can enjoy now and an asset that can grow in value.
The 100 Major Markets
Gee, I wonder what Money Magazine forecasters where predicting for stocks in early 2000? Perhaps a slow-down in the rate of growth?
The Miracle Mortgage
Has anyone else noticed that nearly every participant in the housing bubble is in their thirties? Except, of course Ted, with the hyphenated last name - he let his wife do all the talking.
Like the Berniers, tens of thousands of Americans have recently discovered the power of paying nothing but interest on their home loans.Yes, that's power - when the lifestyle doesn't match the income, what do you do? The answer is obvious if you are 36 or 37 years old.
The appeal is easy to understand: When you don't pay down principal, you can save hundreds, even thousands, of dollars a month. Interest-only payments let you shoulder a bigger mortgage and buy a home you might not otherwise be able to afford. Or you can use the extra cash to pay down debts or fund a child's education.Again with the subterfuge - this is all so sick and twisted. An entire generation of Money Magazine reading thirtysomethings now think that this is how the world really works! Not paying principal is "saving" money and it's OK to buy a home you can't afford!
By the way, who's writing the headlines for Money Magazine stories these days and just how effective is this variety of mind control? Nowhere else in this article is the word "miracle" used. In fact they provide a few sound cautionary notes, but a few glances at the bold headline and the smiling couple, and interest-only loans seem pretty harmless.
No Money Down Mania
OK folks, here it is. This is the real danger in today's real estate market - it's these get-rich-quick gurus that are the ones that everyone has to look out for. It seems all so logical (and sick and twisted), to close this special edition with this article.
Imagine your average Money Magazine reader who may have heard "housing bubble" a few times on the evening news recently. This reader can carefully study this issue, and conclude for himself that the real danger in the real estate market today is these hucksters who are charging people exorbitant amounts of money for their get-rich-quick real estate seminars, with no guarantee of results.
If a friend tips you off to some investment property in Vegas, then hooks you up with a Realtor who is a friend of a friend, and you can get a deal done, well, that's OK.
But don't pay good money to attend one of these seminars!