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How to Buy a $450K Home for $750K   (May 29, 2006)

I recently came across this ad in a major American newspaper and was struck by the "truth in advertising" which was apparently imposed on a typical real estate pitch aimed at the naive and greedy (as opposed to the experienced and greedy).

The ad went on to list "The cutting-edge secrets to buying real estate at 30% to 50% above market value:"

  • Appoint a Federal Reserve which flooded the nation with virtually unlimited money supply even as it lowered interest rates to historic lows
  • Lower lending standards to basically zero so even those with poor credit and no cash can buy a house with no money down and no documented history of financial discipline
  • Enable investors to buy new condos and houses with maximum leverage so that 40% of all new homes are purchased as investments
  • Lower lending reserves requirements to the lowest levels ever, so lenders need not be encumbered with onerous standards like having cash on hand to cover bad debts
  • Enter into an unspoken agreement with our Asian trading partners in which our homeowners can borrow 105% the value of their homes to buy Asian-made consumer goods, and our trading partners will buy all our depreciating long bonds at low rates of return so mortgage rates stay low
  • Keep wage increases down to basically zero so consumers count on re-financing their homes to pay for vacations, college, new cars and boats, etc.
  • Enable a 10-fold expansion of mortgage-backed derivatives and various exotic financial instruments so that trillions of dollars in mortgages can be tranched, sliced and hedged, giving the financial markets the false impression that the risks have been lowered, even as they've actually increased to unprecedented levels
  • Enlist an army of Wall Street and media cheerleaders to promote the notion that "this time it's different" and "housing never drops in value," lulling the unsuspecting into believing that the business cycle and the laws of supply and demand have been officially revoked
  • Encourage builders to build up to 10 times the number of units which sell annually, insuring massive overbuilding (over-supply).
  • Rig the inflation measurements (CPI, etc.) to hide the actual inflation rate (close to 8%)

  • Lo and behold, all the conditions have been met, and it is indeed possible to buy houses for 50% above their market value.

    Of course when inflation can no longer be cloaked, it will be too late to stop its further ascent--which insures mortgage rates will climb, bankrupting all those with adjustable-rate mortgages (ARMs). The massive over-supply of investor-owned units is already raising inventories around the nation, and as this trickle grows to a mighty flood, the foreclosures of the ARM-bankrupted will also hit the markets. As lenders are inundated with losses from risky loans gone bad (surprise, sub-prime borrowers are not good risks), they will no longer be able to lend money as their reserves will have to be rebuilt even as their losses multiply. Leverage will fall off a cliff as lending standards are belatedly raised, but alas, all this will be too little, too late; the over-supply has been built, the demand has been sated, and investor-owned properties will soon be on the market.

    The cutting-edge secret to buying real estate at 30% to 50% below market value? It's this simple: wait a few years for the market to re-set valuations. Pretty simple, huh?

    For more on this subject and a wide array of other topics, please visit my weblog.


    copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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