Your House is Going Down in Value….AGAIN.

Everyone knows 2007 was the worst real estate bust in modern history.   From the early 2000’s until 07, living the American dream by owning your own home was made possible for people that previously would have been permanent renters.  In truth, they couldn’t afford their own home and never should have been given a loan.  No down payment, no problem.  No verified income, no problem.   No job history, no problem.  Almost anyone with a pulse could get a home loan.  The frenzy fed itself and it seemed impossible to lose money on a home.

You know the rest of the story.  Financial carnage ravaged Wall Street as firms were holding assets that were overvalued and deceptively packaged.  The average American saw their home value drop (almost overnight) by as much as 80%.  Wall Street was eventually bailed out by Washington and we were given the promise that nothing like this would ever happen again.  Big banks and Big Government had learned their lesson.

In 07’ and 08’, it was extremely difficult to qualify for a loan.  It seemed that Wall Street and Washington were making good on their promises to correct the system.  Corporations and individuals began deleveraging and for the first time in a decade as people realized that the good times can’t always continue.   Once corporations and individuals deleveraged just enough to feel comfortable again, something very interesting happened.  The same flaws with lenient lending standards started to creep in again.   But this time it didn’t show up in the form of loans made to people who couldn’t afford them.  Rather it showed up in the form of the lowest interest rates in the last century.  The Government has been backing lenders and is encouraging them to jumpstart the economy by making loans again.

It begs the question, after what happened in 2008, why would Wall Street or the Government intentionally suppress interest rates to unheard of levels?  The short answer is a bad economy is not just bad for Wall Street, but it’s also bad for government.  People tend to blame those in power.  To right the ship, the government felt it needed to do something to try to bolster the economy.  Because the housing sector makes up such a substantial (and influential) portion of the economy, the temptation to artificially make things looks better than they are was too much for a politician to pass up.  Interest rates in the low 2% range is bound to do one thing….create demand for housing.  And demand it has created.  From September 2011 to September 2012, we saw homes increase in value by 11%.   Home owners a thrilled to regain some of the equity lost in 2008, but what many don’t realize is this new-found growth is the next big housing bubble.

You see, the housing market now is not the result of a healing economy.  It’s the result of incentives no one could offer except the U.S. government.  It is temporarily making the housing market rise, yet it’s re-creating the very bubble that caused the problem in the first place. People who are buying homes now are paying a higher price than they would have paid a year ago.  People a year from now will pay and even higher price.  As more and more trust is put into this artificial housing market, you’ll see more and more people forgetting the heartache and financial ruin caused by the housing crisis of 07’-08’.

What happens when interest rates rise?   And that’s a question of when, not if.  When the backstop from the Government is over, conventional lenders won’t want to loan money at the same rate, given the risk involved.   When the low interest rate era is over, the demand for housing will once again plummet, make home values drop again….once again leaving people in homes that are worth less than what they owe.

The housing market that’s supposedly healing and recovering is nothing more than the next big bubble.  It’s a man-made bubble that will deflate again like all other bubbles before it.

To prepare for the next crash, there are a few things you can do.  One, keep debt levels very low.  Even better, get completely out of debt.  Those that truly own their own homes aren’t as affected by the ups and downs of the market.  Two, avoid buying into the propaganda and sales pitches that banks and government promote.  They always have self-serving interests.  Three, buy hard assets.  Golf clubs don’t count.  Invest money into thing that people need or have to have.  Food, energy, housing, etc.  Four, make sure you and your family are prepared for another crash.  Though the housing market wouldn’t seem to have effects on things like job stability, it does.  A crisis in any market makes companies fearful.  That’s when they start cutting expenses and employees.  Having your own food storage and Seed Bank is the ultimate back-stop for survival.

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