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A Prayer, Hope, A Dream And Real Estate

"Pray look better, Sir... those things yonder are no giants, but windmills." - Miguel De Cervantes 1547-1616, Spanish Novelist, Dramatist, Poet

There are several responses to the introduction of the 40 year mortgage

  1. The term noose around the neck takes on a new meaning now. A 30-year mortgage was a loose noose around the neck, a 40-year mortgage is one where the noose has been tightened and now all that is left is for the hangmen to pull the lever.

  2. It gives one the illusion that the price one is paying for these over inflated properties is not so insane because of the lower monthly payments. Most individuals look at the monthly payment rather then the final price. That's why so many of them go out and buy these 30-40K cars when they don't really need a new one; the monthly payments appear to be reasonable. Tell them to pay for that in cash and watch 90% of them balk.

  3. It has been introduced in order to keep the housing bubble alive. The feds are aware that unless they create some other speculative phase that the housing bubble must be kept alive at all costs.

Lets examine reason number 3 in more detail, as we believe that's the main reason this form of mortgage came into existence. The real estate market is in a normal bubble phase (well that begs the question as to what is really a normal bubble, but that subject will have to be dealt with on a separate article) and is now entering an extended bubble phase without the introduction of the 40-year mortgage. This new mortgage is going to take it into the hyper extended phase.

This story below is an example of this market entering the extended bubble phase. Individuals who are in the higher income earning brackets are snapping up 2nd and third homes for investment purposes. They are doing so when the prices have risen in excess of 100% in some areas. A good investor never ever puts money into an over inflated asset, no matter how strong the market might appear to be. The principle of being a good investor is to buy in areas where the masses are not paying any attention and avoid those where there appears to be a feeding frenzy.

With Market Hot, More People Now Have Third Homes

The Wall Street Journal Online
By Raymund Flandez

Jay Lieberman, a dentist who lives outside Washington D.C., also owns a home perched on the slopes of Park City, Utah, which he uses as a ski getaway for his family. Late last year, Mr. Lieberman decided to snap up a third home as well. "I bought it purely as an investment," says the 58 year old. He plans to use the 2,200-square-foot house, also in Park City, as a rental property. Mr. Lieberman rented it out for two weeks over Christmas, and it is booked for the Sundance Film Festival this month. Second-home ownership has jumped significantly in the past decade, thanks in large part to record-low interest rates on mortgages and the rapid appreciation of real-estate prices. Now, motivated by those same factors, as well as some others -- from a desire to retire in multiple locations to an interest in being nearer to relatives -- more people are picking up third homes, too.

While academics and economists say no one systematically tracks the third-home market nationally, brokers from California to Florida say more of their clients are buying a third piece of property. Alice Sardell, owner of the real-estate firm Sardell & Co. in Aventura, Fla., north of Miami, says she sold third homes to at least 40 people last year, double what she sold the year before last. The homes ranged in price from $265,000 to $2.4 million. http://biz.yahoo.com/weekend/thirdhouse_1.html

The story below is yet another example of the extended phase the real estate bubble is entering. It is amazing to see the discrepancy in two areas where the median income is about the same. The difference in house prices a few months later in Santa Barbara county was more then the cost of buying a new home in Lima; the thoughts insane and mentally certifiable comes to mind.

Real Estate

Nine of the 10 most-affordable markets in the organization's Housing Opportunity Index are in Ohio, Michigan or Illinois. All of the 10 least-affordable housing markets are in California. The median household income in Santa BarbaraCounty in 2004 was $64,700. The NAHB says the median price of a home in metro Santa Barbara was $447,000 in the third quarter of 2004. To get a sense of the pace of price appreciation there, consider that the California Association of Realtors says the median price of a home in the county was $668,750 in November, just a couple months later.

Affordable Lima (pronounced like the bean, not the city in Peru) could scarcely be more different from Santa Barbara. Its skies are grey most of the winter, and it is surrounded by abundant, flat farmland that is pretty, but unspectacular. HUD says Lima's median family income in 2004 was $52,500. The median sale price of all homes sold in the third quarter of 2004 was $82,000, according to the NAHB. In other words, a typical home in Santa Barbara costs more than 10 times a typical family's income, while a home in Lima costs about 1.6 times a family's income. Full Story

So far we have dealt with the extended phase of the bubble, the introduction of the 40-year mortgage is going to take us into the hyper extended phase. This is the stage basically where individuals who should not have been buying their first house now consider that buying a second house might be a good investment. So how will they be able to buy this second home if they can barley afford their first home. First of all we need to understand the full thought process behind this action. This hyper extended phase is nothing but a prime example of mass psychology in action. The motivation here is greed, everyone is making money and it's so easy. Why are we not taking the risk? So they will borrow from their credit cards, take a loan, and do whatever it takes to come up with that down payment. The monthly payments for the mortgage will come from the rent the house generates. The potential for serious trouble along the line is huge. The individuals renting might not be good tenants and not pay the rent on time or they might just stop paying the rent. Hiring a lawyer to evict them will cost money and their mortgage payments will go into default before the matter is resolved. The tenants could lose their jobs and leave and then it could take several months to find a new good tenant; again this might enough time for them to default on their mortgage. So far we are dealing with normal situations.  The end game begins when real estate prices start to fall precipitously; the outcome millions will be joining the ranks of the poor and homeless.

A quick search on yahoo and goggle revealed several companies are already busy pumping out the 40-year mortgage. They are pumping it as solution to the problem of high priced houses that were out of reach because of their high monthly payments; with a 10-year extension those payments can be reduced to an affordable level. The thought from the frying pan to the fire comes to mind.

The real estate bubble goes Global

In 2000 you could have a bought an apartment in a city called Zhitomir (60 miles from the capital Kiev) in Ukraine for under 2500 dollars. Yes that's right for less than 2,500 dollars, today the same apt is selling in excess of 12K. In Kiev apartments that were going for 10-15k in 2000-2001 are now selling in excess of 30K.

One of our subscribers who is currently in India had the following comments to make.

"Greetings from India. Many Indians are now going into debt to buy homes (usually cash was paid and help from family was involved). Foreign banks will now be allowed to operate here more liberally". - Starr

Several associates of mine who spend a lot of time in various countries in Eastern Europe have stated that property prices have gone up in excess of 100%. The same story can be found if one examines the real estate bubble in Australia, Alan Lunt who resides in New Zealand has told me on several occasions that the real estate market has gone completely insane. The primary driver of prices in 90% of the cases has been access to easy credit brought about by rates that have been kept artificially low by the Central Bankers. The bottom line is that we have a global real estate bubble on our hands and for those that are unprepared there will be nowhere left to hide when this bubble explodes.


The masses as a rule never ever learn. They are doomed to repeat their mistakes over and over again. Hence the saying "history repeats itself". They seem to love pain and misery and its something that will stay with the majority forever. The bursting of the Nasdaq bubble less than 5 years ago where trillions of dollars in market value were wiped out taught them nothing. They seem to think this is their second chance to make the killing of a lifetime. The sad part is just like the Nasdaq bubble; the masses are jumping in towards the end rather than at the beginning of the move.

It is the talk of the town now that real estate is the way to go now and the way to make a fortune. Everyone who knows nothing about investing has suddenly become a top-notch expert in this field and is busy dishing out advice. This is eerily similar to the last stages of the Nasdaq bubble. When markets enter the extended bubble phase it is really hard to predict when the end will come, however now that they are entering the hyperextend phase it virtually becomes impossible. All technical and fundamental tools cease to function, sanity is replaced with insanity and greed. What is certain is when this bubble bursts it going to be extremely painful and millions of individuals will find themselves among the ranks of the poor and destitute. . The only way to prepare for this is to not jump on the mass bandwagon of greed, pay down your debt, start saving money and keep only the house you are living in. In addition make sure you lock in a fixed low rate (rates are still at 40 year lows) and just completely stop paying attention to the housing sector. The wise never try to time the exact top or try to extract maximum gains once a market has entered into a bubble phase; those that do usually find themselves in a meat grinder.

"A hallucination is a fact, not an error; what is erroneous is a judgment based upon it." - Bertrand Russell 1872-1970, British Philosopher, Mathematician, Essayist

Brilliant investment returns with the Luck of the Irish
By John Tyler

Now even the Irish are seen as brilliant and wealthy investors. As a long term watcher of the Irish, I have some concern.

It is unfortunate when one sees intelligence being bred out of a population. For generations, the most intelligent Irish sons became celibate priests. The "bluntest tools in the shed" were left to perpetuate the genetic pool. And then any Irish person with "get up and go", got up and went, or were sent to a British penal colony.

However Ireland is now leading the world in rising property values.

Surely this must indicate that the bubble is near bursting?

An old Scottish proverb says "First the Home" when taking of the road to riches. It seems that the Irish have caught on to this now as even the Leprechauns are exchanging their pots of gold for some plasterboard and carpet on a Bogside tenement.

America's house-price boom looks modest compared to Ireland's. However, the average price gain over the past few years has been the fastest in history.

National figures hide local bubbles. Parts of California and New York have seen house-price increases of more than 80% in the past five years.

The Irish seem overjoyed that they are world leaders in the rush to property as evidenced by these figures sourced from The Irish property review.

What luck! To find that the hovel you bought for $120,000, is now worth more than $250,00. And Paddy, who's never done a day's work in his life, is now a millionaire with his old dad's stone cottage.

The Blarney goes on, like the froth on a pint of Guinness:

  • Property price inflation is openly talked about as though it acceptable and of no concern.

  • Rising house prices are seen as the main driver of the Irish economy.

We know that higher house prices means that paper wealth surges, and this in turn boosts consumer spending.

Every bubble is accompanied by the blind belief that "it's different this time".

It is certainly different this time!

1. The property bubble is global with the exception of Japan that is still trying to recover from its local bubble in the 1990s.

What happened to Japan will occur on a global scale in the not too distant future.

2. This bubble is unprecedented in financial terms.

The economist reports that in the past three years, the total value of residential property has been  estimated to increase by $20 trillion. This is double the expansion of history's largest stock market bubble.

3. The property bubble is synchronised with a global equity market bubble.

The "investment clock" appears to have stopped. It is indeed unusual to see stock market and property bubbles together. From Russia to Australia, stock markets are topping out.

4. Demographic factors are of great concern. The population trend in most western nations is down. The population is aging and less able to generate real economic growth. There are more single person occupancies, but the social implications of this, together with the aging population, make this a welfare time bomb.

Aged singles would rather have a friend than a property portfolio.

We used to laugh at the thought of the mad building castles in the sky and the psychiatrists collecting the rent. Now it's the apparently sane, building castles on the ground, with the rent being government taxes, rates and levies with soaring insurance costs that still leave investors exposed.

Is officialdom concerned?

Alan Greenspan, chairman of the Federal Reserve, has dismissed the idea of a bubble in the United States, however he believes that the house-price boom will slow this year. He knows the danger of, and has the power, to cause a stampede.

A "soft landing" is talked about, but it looks like the parachute has failed to open.

The IMF and OECD have both warned about markets in the UK and Australia, but this has been neatly swept under the carpet by respective governments.

Chairman Greenspan acknowledges that there are property hot-spots, but rejects the notion of a national housing bubble, arguing that high transaction costs discourage the buying and selling frenzy seen in financial-market bubbles. Hey, see the admission that Government has its snout deep in the trough? This has never prevented housing bubbles elsewhere.

The big lie is that a soft landing can be engineered by economic policy.

The economic policy of easy money and low rates can start a bubble, but once a boom starts, it is fuelled by the hopes and aspirations of the populace. It becomes political suicide to raise rates, as they fail to work to slow a bubble. They have to be raised until such time as the bubble bursts, for bursting a bubble is the only way for a bubble to go.

Is property a good investment?

Before you rush out and buy, do as my wife and I did on a bleak and rainy afternoon. Look at the "quality" end of the market, do the figures, and get a sense of what's happening.

  • The place was teaming with hungry looking agents, and yet the property was poorly presented. A Kleenex tissue has been stuck into a piece of broken stained glass.

  • There were 3 apartments for sale in a complex of 20, and yet this was a top residential address in town.

  • Only 50% were owner occupied.

  • We were telephoned the following week by agents inviting us to make an offer so we wouldn't miss out. In our sleepy town, an agent follow-up is a headline event.

And now for the figures, converted to dollars:

Asking price $800,000 for a 2 bedroom apartment- one would add a $40,000 state property tax.

The owner could expect to receive $450 a week rental according to the agent, but have to pay land tax, insurances and body corporate fees of $11,000 per annum.

Lets assume the agent is correct, even though $400 a week would be more realistic. We'll also assume that the owner has no loan obligations. The whole thing has been funded by a lifetime of labour, and "now is the time to invest in the king of all investments as property never goes down."

Annual net return $22,400, or 2.7% on capital.

Unfortunately this doesn't account for any possible fall in the value of the property. It is likely that even for this wealthy investor, there will be a negative return when this is taken into account.

For investors who have taken loans, the losses may be huge. The interest rate cycle has turned. Further rate rises are inevitable.

It's still not too late to escape from the consequences of this current bubble that will take a generation to unwind.

May the luck of the Irish be with you!

John Tyler CEO,

PS I have Irish blood myself. The Irish have been the victims of history. Fellow countrymen, let's not repeat it!

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