The Housing Bubble

I’m sure that you’ve read about the bubble in residential real estate prices, most noticeably on the coasts in the U.S.. (There are similar bubbles in Oz and England, both of which have already seen their peaks. Far too many people have over-extended their finances buying houses. In fact, up to 35% of the houses being sold in some markets are being bought purely on speculation, with the goal of “flipping” them within six months to take advantage of the rising market. This is making some speculators a lot of quick money, for now. But at some point the music will stop and there will be lot of speculators caught without a chair.

Most people don’t realize the full implications of the housing bubble. The over-inflation of house prices is keeping the consumer economy afloat. People are “taking equity out of their houses” to pay for geegaws and electronic gadgets. When the bubble bursts it will at the very least throw the American economy into a recession, and possibly a depression. For background, read Gary North‘s recent Reality Check article titled: MOM, APPLE PIE, AND HOUSING BUBBLES. (Issue #472, on August 12, 2005.) Also read the piece titled Don’t Let Me Burst Your (Housing) Bubble by Steven Greenhut, a senior editorial writer and columnist for The Orange County Register.

When the bubble does burst, watch out. Things could get ugly. I predict that people that are caught “upside down” in their mortgages will just turn in the keys at the bank and walk away from their houses. This has happened before–most notably in Texas in the 1980s when the Houston Oil Boom fell apart and took the real estate market for the region with it.

My advice: Sell any rental or non-retreat vacation houses that you own. Take your profit now. It is better to be a year too early than a day too late. Keep that money on the sidelines, with at least a portion of it in precious metals. Then after the bubble bursts, you’ll have the chance to step in with cash and buy at perhaps as low as 40 cents on the dollar versus the currently over-inflated prices. When you eventually do decide to buy, concentrate on productive farm land in a lightly populated rural region. (See my previous posts for guidelines on the best type of property to buy.)