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Written by José D. Roncal
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Friday, 15 October 2010 16:57 |
In the U.S. owning your own home has always been the symbol of success—a big part of the so-called “American Dream.” A house was a secure shelter for families and, for the average family, it was the largest asset on their balance sheet. But primarily, because of the misguided notion that real estate values would perpetually appreciate, homeownership was considered an essential “investment” for the future. Investment? Now there’s a tricky word.
If you’ve read our bookThe Big Gamble: Are You Investing or Speculating?, you know that the concept of investing is just that, a concept. The book cautions you to take a step back and see things from a whole new perspective. It’s an invitation to realize that there is really no such thing as an investment—it’s all speculation.
More and more, that fact has become painfully clear as people discover that the homeowner dream has become a nightmare. The value of their homes has eroded, but . . ah . . those monthly mortgage payments; they just keep on coming due.
And with so many having lost their jobs, through no fault of their own, a home is no longer seen as the cornerstone of success, but rather an albatross they’re stuck with because few are able to off load an albatross in this miserable market. Forget about relocating for a possible job offer. That once secure “investment” has turned into a ball and chain that restricts the freedom to move or to look for employment elsewhere.
The nightmare of foreclosure has become a reality. Just how bad is it? Up to twenty-five percent of all U.S. homes are worth less than the balance owed to lenders—making them ripe for default and foreclosure. According to statistics from housing data firm, RealtyTrac, there’s a backlog of more than 1.2 million loans in the process of foreclosure in the U.S. The banks have repossessed an additional 900,000 properties, while five million more loans are seriously delinquent.
It’s common knowledge that fraudulent mortgage brokers perpetrated countless mortgages upon unqualified borrowers. Now we’re learning that some of those same homeowners are being subjected to fraudulent foreclosures. Lenders have been found guilty of shoddy paperwork and in a rush to foreclose, have staffed up their mortgage services divisions with totally unqualified employees: former hair stylists, Walmart floor workers, and people fresh off assembly lines. With no formal training, they were deemed "foreclosure experts" and given their own rubber stamp.
When questioned, many of those “experts” testified that they barely knew what a mortgage was. Some couldn't define essential terms including: affidavit, compliant, promissory note, mortgagee, and lien. Some readily admitted that they knew they were not being truthful when they signed the foreclosure documents and sided with attorneys for the homeowners when accusations were made about rampant fraud in the processing.
The robo-signer scandal has put the brakes on the foreclosure process nation-wide and nobody knows what to expect next. Until then, the debacle has injected new uncertainty into the already weak housing market. The bottom line is that all of these would-be homeowners mistakenly believed they were making investments.
Recently we read a quote from Wharton real estate professor Joseph Gyourko, “Homeowners who are disappointed with their decision to buy a home are only discovering what housing economists have always known -- a home should not be considered an investment.” Hello?
Naturally we agree with that. Homes should be considered a place to live, not an investment. To that we would add stocks, bonds, commodities, derivatives, and any number of instruments that consumers pour their money into. None of these should be considered investments. If you’ve got the money to speculate in real estate, or anything else, go for it. Just understand that you are taking a speculative risk. Meanwhile, get a clear understanding of the difference between investing and speculating by reading our book,The Big Gamble: Are You Investing or Speculating?. It might help you make more informed decisions and avoid future mistakes. |
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Written by José D. Roncal
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Friday, 01 October 2010 04:09 |
Sometimes it takes a hard knock to realize the logic of what we’ve been saying all along: There is no such thing as an “investment.” It’s all speculation. We’ve written about it repeatedly in our blog and in our bookThe Big Gamble: Are You Investing or Speculating? So, when we use the word “investor ” here, just replace it in your head with any other word that means “not really making an informed decision, but rather, placing a bet and hoping for the best.”
The economy has taken such a hard knock it’s hard to know where to put your money for safety and growth potential. The markets are so unpredictable, it’s like being inside that M. C. Escher lithograph, Ascending and Descending. You’re on a path that seems to be taking you up, but before you can figure out how or why, you’re suddenly headed back down again.
After suffering major hits in home equity and stock portfolios, people are scrambling to recoup their losses. Many investors are transferring money from stocks to bonds in hopes of getting both yield and security. Some are rushing into emerging markets, high-yield corporate debt, gold, and a plethora of other investments that the typical investor once considered too risky.
When times are uncertain, emotions rule and mistakes are made. We’ve written recently about how all this herd mentality movement is creating the potential for a gold bubble or a bond bubble. These changes in investor behavior may have a noticeable effect on the economy in the short-term, but it not going to create much of a long-term impact. The government's decisions about interest rates, taxes, and the dealing with the national deficit will have a much broader and longer-term influence that any investor decisions.
The Feds are already influencing individual investment preferences. By keeping interest rates near zero—in an attempt to stimulate economic growth—there is less incentive to save, therefore investors look elsewhere to create wealth, such as the aforementioned bonds. In a sense, the Feds are responsible for co-creating a false demand for these assets, a demand that will inevitably evaporate as soon as they raise rates again. And when they do raise rates, what happens to bonds?
In the first six months of 2010, as $29.6 billion was flowing out of stocks, investors were pumping $185.6 billion of new cash into bond funds. We wonder if all these newcomers to the bond market are aware that bond prices and interest rates move in opposite directions? It’s not difficult to understand. Rates go up, bond prices go down; rates go down, bond prices go up.
It’s true that those who hold bonds to maturity will always receive a specified dollar amount, which is why bonds are inherently less risky than stocks. But wait, that $185.6 billion we mentioned went into bond funds, and those fund managers sell the bonds as soon as they get close to maturity . . . and replace them with similar bonds that will mature at a later date. It’s impossible to hold a bond to maturity when it’s in a fund. So when interest rates rise, it creates a permanent loss in bond fund portfolios. Therein lies the danger.
But for now, at least, the Fed is hesitant to raise rates. Doing so would put too much pressure on a fragile economy just as it begins to recover. For instance, higher rates could mean that many firms will have to pay more in interest on loans they need for expansion. Slowing expansion stifles growth, or worse, forces the weaker companies out of business, boosts unemployment figures, and on and on.
Meanwhile, emotional decision-making continues among investors who have little or no inkling of the risks they are taking. And like those unwitting characters trapped inside Escher’s lithograph, they can’t see the big picture—they just blindly follow the guy in front of them around a circular path that sooner or later will take them into another descent.
When you read our book,The Big Gamble: Are You Investing or Speculating you can gain a better understanding of how this all works, and even get a few hints about how to get off that confounded Ascending and Descending staircase! |
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