"History is indeed little more than the register of the crimes, follies and misfortunes of mankind." ~ Edward Gibbon
Real Estate Bubbles: Your House, Your Coffin
Charles Mackay would have included American home ownership as a teaser for his next edition if he lived during our time. 'Mankind's Extraordinary Popular Delusion Number 8,437: The early 2000's housing bubble. Never mind the over mentioned speculative buying dangers of the boom, let's pop this balloon with the pin of common sense.
Before you shun me for disrespecting the quintessential American dream, hear me out. Taking stock of my credentials'a master's degree in architecture, a seasoned real estate agent and investor, and a self taught homespun economist'you would think I favor buying into traditional cookie-cuttered suburban shoeboxes for dwellings or investments. Nothing could diverge further from the truth. No, this isn't a dissertation on suburban sprawl and its consequential environmental raping. While I admit, a shred of tree hugger exists inside of me, it's more a financial warning than anything else.
As a real estate agent, I grovel on my knees at the confessional. I have sinned by helping people buy homes which are not only dangerous for human occupation, but support predatory banking institutions that subscribe to government fiat currency dogma and easy credit. But I continue sinning, first for the sake of feeding my family, and second, since no superior product exists at a competitive price.
A man's home is his castle, right? Picture yourself in my native central plains of southernmost tornado alley. Imagine a box framed out of termite food, or oversized match sticks. Look. I'm no biologist, but what is a termite's favorite snack? And what common item has man thrown on flames for millennia to fuel fire? Now add some baked clay blocks on the outside used as a decorative veneer (No, the brick on your house does NOT hold anything up. The wood framing does). Yes, your family occupies a box of tornado fodder. Maybe the past necessitated building of wood because of its prominence as an abundant natural resource, and lack of better technology. But in the day and age of micro-processing and global telecommunication, we still build dwellings using an ancient anachronism for the sake of aesthetics and nostalgia. Remember. Castles originated as strongholds for protection. Shoot a bullet or a wind-fed, supersonic two by four through your home's walls and see if you would use it as a fortress. The fact remains, our houses are fragile coffins. Or, as architects would say'using technical terms'built of crap.
'Yes, but . . . insurance would cover losses in the event of a disaster!' the masses and their real estate professionals argue. First of all, no insurance in the history of mankind has ever jump-started a failed heartbeat or lung respiration. What's your life worth?
Second, do you really believe insurance will compensate you in a timely manner under crisis conditions, if at all? Soon after the devastating Gulf Coast hurricanes of 2005, we received a call from a Mississippi doctor expressing an interest in a steel reinforced concrete home. Upon further inquiry, we found out the storm leveled his beach front home, and insurance compensation was either years away given the local disaster conditions, or maybe nonexistent. How do you feel about your insurance policy now? Hint to lenders: try lending on properties built like fortresses.
'But don't the building codes require stronger structures?' the masses inquire. Well, visit a disaster site and tell me how well you think they worked.
Many countries throughout the world don't fall victim to anemic construction. Whether plagued by violence and war, or severe storms and earthquakes, they build their properties with steel reinforced concrete. Nor do many of our neighbors leave big, vulnerable facades facing the street without some type of protection against criminal predators. They enclose their properties with tall, concrete perimeter walls'sometimes lined on top with coiled razor wire or shards of broken glass (see if you can get those items approved by your homeowners' association, or architectural integrity committee). Sounds like a fortress to me. 'But, those are war torn, Third World countries,' you say. Look, we're one economic crisis away from falling victim to the same designation.
But enough of the physical pragmatics. Let's talk money. To say that wood frame homes are evil because home builders produce a cheap product for fast profits would be contrary to free market principles. We still buy them. Why? Because they're cheap. After all 'The costs of building with stronger materials is prohibitive,' the victims of outdated housing paradigms fear. Well, thanks to closed-minded 'comparables only' appraisals, and complacency to insure unconventional structures, yes. Pile on good ol' government intervention in the form of insured lending (VA, HUD, Fannie Mae, etc.) and you've eliminated the lender's risk and incentive to fund sound investments built of strong materials. In our 'I want it now' day and age of easy credit, the masses have fallen prey to the amortization wolves. (Heavens above! Buying a house and paying for it'in full'with hard earned savings? Who's ever heard of such a preposterous idea? Thanks for the low interest rates, Mr. Fed.)
And if affordability isn't an issue for you, here's food for future thought. Thinking of sinking money into property for the sake of preserving your wealth's value during times of inflation? Ever heard of eminent domain? Contrary to herd-mentality thinking, you can only keep that which you can defend. Keep an eye on our ever fattening police state. Example: As part of the Patriot Act, title companies often ask our clients to sign Homeland Security identity verification forms during closings. It's only a matter of time before we all get profiled as suspects who go against the politically correct grain. Ask any pre-Castro Cuban what happened to their hard earned property after January 1 of 1959'confiscated by the state, kids. See if that adds up to liquidity when you need to cash out on a real estate deal, especially during a crisis.
Just think of the billions currently invested in America 's matchboxes, and all of them subject to both natural disaster and democratic mob rule. Did you hear that 'popping' noise?