Sam Sez

Date: Tuesday, May 17, 2005

Question: "Are these bubble symptoms? "


Higher prices, lower margins or down payments, and everybody rushing to the same side of the market.

In the 1920's stock prices soared on highly leveraged transactions. Margin requirements of 10 percent down frequently fueled buying frenzy. Fast forward to the present. Residences can now be purchased with zero down, that's right, 0.00 % down, with hybrids requiring only interest only for the first few years. While this has been explained away as enabling those people who could not afford a home without these less onerous terms, the bottom line is that they are buying properties with no cushion and paying top dollar too. This type of financing can be more dangerous than commodities trading where at least some performance bond is required and positions are marked-to-market.

Party talk often relates stories of property flippers who scored $50 thousand, $100 thousand or more on a quick transaction. The housing market has morphed into a speculative game. The only question is "Who is going to be left standing when the music stops?"

A growing number of mortgages are for second homes or "investment" properties. Condos are sold out before a tenant moves in. That does not sound like buying shelter but participating in speculation. Low interest rates sponsored the demand and higher interest rates will eventually choke off that demand. With a growing inventory of empty nests, something has to give. Will it be the prices?

How does this impact your strategic position? To discover more, click here.

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