The 4 most dangerous words in finance…

It’s been a while since I’ve posted my last blog and I’m sorry to have been away so long.  Many things have been happening personally recently – all good! – and just takes a lot of perseverance to get through.

Speaking of perseverance, the news about the economy is slowly getting better.  A lot of people have struggled through this recession for the past few years, and as a country, we’ve had to adapt and overcome the hardship.  Some folks were more successful than others in dealing with job loss, home loss, and financial hardship.

While 2008 was five, yes five, years ago, for me it doesn’t seem like that long ago.

So to me, it seemed strange that I would see this article about the recovery in the housing market.

Wasn’t it a real estate bubble that helped push the economy over the brink?

Didn’t people rush to buy for fear of losing out on a “good deal”?

Wasn’t it a rise in interest rates on ARM mortgages that made payments even more unaffordable and led to record numbers of defaults?

I’m sure all of the people rushing to buy homes today are all thinking the 4 most dangerous words in finance…

This time is different.

A couple of points I find interesting in the article:

Home prices are rising fast, and buyers feel they might get left out.

Isn’t this the classic definition of a bubble?

There are plenty of reasons of why people need to buy houses, but is “feeling like you might miss out” really a legitimate reason?

The rise in interest rates is causing real estate deals to “break”.

I’m sure these deals seem really good and the people are nice and the homes are lovely.

But if the (relatively small) rise in interest rates is causing deals to break, they are paying too much for that house!

Deals that break means the buyer can’t afford the monthly payment.  And if the numbers were that tight, they have no business buying the home in the first place.

People are “rushing” to ARMs.

Buyers are looking to adjustable rate mortgages (ARM) to keep their interest rates, and therefore payments, low in order to afford the houses.

While rates may have risen a bit, interest rates are still at all time historic lows.  Which means only 1 thing – rates will go up.

And when they do, these mortgages will reset and the payments will go up.

I’m sure the buyers are thinking that their incomes will go up, or that they’ll get new jobs, or that home values will go up substantially so they can refinance down the road.

All of those things may come true.  Or they may not.  But this is why everything – the economy included – goes in cycles.

In school, I learned the phrase – Those who don’t learn from history are doomed to repeat it.

And unfortunately that will always be true when there are people willing to say “This time is different.”