Talbott has throughly researched this subject, and it is nice to hear from someone who is not affiliated with the real estate market comment on the state of housing in America. He points out that a number of factors could cause not only a correction, but an outright crash:
1. Overleverage (especially in the case of ARMs)
2. Interest rate increases
3. Potential deflation
4. The precarious state of Fannie Mae and Freddie Mac, companies that are basically unregulated and leveraged to the hilt.
It is my own belief that a 2% increase in interest rates from 6% to 8% will start in motion one of the worst economic fiascos this country has ever witnessed.
Housing has typically been a hedge against inflation. This time it will be inflation that kills the housing market. President Bush recently spent 800 Billion in 2 days. Federal spending is up over 30%. The Medicare bill will cost the US between 2 and 3 TRILLION dollars in the next 20 years. Only through devaluing the dollar (which has already begun) and massive tax increases, can the government hope to pay its bills. This means inflation, and lots of it. The people that are investing in real estate have a chronic myopia when it comes to economic history.
I share the authors concerns about Fannie Mae and Freddie Mac. Hopefully, with the Treasury now overseeing these two institutions we might see some progress in getting these two goliaths under control.
I would have found it helpful if the author spent some more time drawing contrast to some of the previous real estate bubbles that we have seen around the globe. Japan and Hong Kong are two recent examples of what can go wrong when the bubble bursts. As well, it would have been nice to see data prior to 1968. Thirty-five years is still a relatively short period of time.
Many on here have already pointed out the main themes I came away with, so I'll not be redundant. Given that, it is important to note that real estate markets are local and not national. Yeah, yeah we've all heard that before, and other factors, such as changes in interest rates, are national, not local, trends.
But like everything in life, it's neither black or white but shades of gray that matter. I almost chuckle at those who are worried about prices having risen 50% in 3 or 4 years. Friend, that's nothing to worry about. An excellent return, perhaps a bit out of the ordinary, but nothing to lose sleep over.
Here's what I lose sleep over. Paid $340 in March 1998 in Orange County. Same house now on market down the street for $950!! That's closing in on a a 3-bagger, in the parlance of Peter Lynch, in 6 years. Moreover, I read yesterday that while the mix of fixed to variable rate loans nationally is roughly 70-30 (assumption being that fixed rate loans provide some protection against a downturn), here in California it's the reverse! - 70% of all loans are variable or worse yet "interest only".
What will happen here when the chickens come home to roost? We're getting back to where we were in '89......