Hi, this is Jennifer from the Lone Star Silver Exchange. I want to thank everyone who took advantage of our sale on rounds. The price has increased $.70, so your investment has already appreciated! Due to popular demand, we will soon offer Maple Leaf coins individually, not just in the Sampler. Look for details in the next newsletter.
Looking for State Quarters?
I know a lot of our members collect coins as well as invest in silver. If you're looking for a good deal on state quarters, check out Randy's Mart (http://www.randysmart.com). Randy has the best prices I've seen on the internet, and he gives you prompt, helpful service. He's selling a set of Texas quarters for only $1.99 including shipping! The earlier state quarters have appreciated a lot in price. It's a good idea to buy now if you want to collect the whole set, or just give your favorite state quarters as a gift.
Is There a Housing Bubble?
I'm sure you all remember the stock market bubble of the 1990s. People were throwing money at companies that never made a profit, and didn't have much of a business plan. It became a mania before the crash in March 2000. It's easy to see the craziness a few years after the fact, but it can be hard while the "irrational exuberance" reigns. Let's discuss some characteristics of a bubble, and see if the real estate market qualifies.
In "A Short History of Financial Euphoria," by John Kenneth Galbraith, he decribes the characteristics of bubbles. First, a new product, idea or change in the economy occurs. A small group of people focus on an asset class, and its price goes up. The first group of buyers is lauded as brilliant for their foresight.
In many parts of the country, real estate got a big boost when investors fled the stock market after the 2000 crash. Interest rates dropped gradually until they hit bottom in 2003. It seemed that everyone could afford a larger house for less money, due to the lowest rates in 45 years. I think we all know friends and relatives who sold their houses for a lot more than they paid for them. Many people saved money by refinancing their homes. There was even a "reality" TV show about a real estate mogul, Donald Trump.
Galbraith notes that price increases bring in new buyers, who cause the price to rise further. The public believes rationalizations that the market will head up forever, due to a fundamental change in the economy. People don't remember similar ventures which lost money in the past. Pundits denounce anyone who is cautious about the asset class. More speculators jump in, looking for quick profits. They buy and sell, making money off "momentum."
On the East and West Coasts, real estate prices have increased tremendously. In the D.C. area, some houses are selling in a day for $100,000 over the asking price. In Southern California, a "starter" home costs a half million. According to Realty Times, wages are not keeping up with real estate prices. To compensate, Americans are taking out very risky loans, such as negative amortization mortgages. Monthly payments are less than the normal interest charge, which makes the terms more affordable. Other people use adjustable-rate mortgages (ARMs), betting that interest payments will stay low. If rates go up 2-3%, their mortgage will double. Even more speculative are loans called "107s." The mortgage company lends 107% of the value of the home, and no down payment is required. This allows the homeowner to take the extra cash and invest it elsewhere. The market has to appreciate 7% just to break even! If the economy deteriorates, this investor could be left bankrupt and homeless.
Most people don't seem to realize that housing prices could fall. This happened nationwide during the late 1980s, even though there wasn't a recession at the time. In the 1920s housing bubble, homes in the Miami area sold for over $4 million, the same price they cost today in depreciated dollars. Despite the record high prices and low rates, I've read articles encouraging people to take out 40-year mortgages and ARMs.
Stories have started to circulate on the internet about people who bought a house in a new development, held onto it for a few months until all the units were sold, then resold it for a $50,000 profit. These aren't regular homeowners, they're speculators. Once we see momentum investors jump in to make some quick money, I think it's safe to call this a bubble.
Galbraith describes how a bubble bursts. Without warning, a few savvy investors leave the market, and a few more follow them. The price stops rising, and dips a bit. At some point, people start to panic and dump their investment at whatever price they can get. A recession or even a depression may follow this crash. (To read more about the housing bubble, see http://www.smartmoney.com/theproshop/index.cfm?story=20040729).
The point of this newsletter is not to convince you to sell your house. We all need somewhere to live. However, it's smart to calculate what you really can afford, and to leave a cushion for emergencies. Maybe you should consider moving to a cheaper area, even out of state if you can.
Housing is near a market top. Be wary of any investment which forces you to buy when prices are high. How much higher will they go? Silver is near a 600 year bottom, so it's safer than most real estate. There's no shortage of land, like there is in silver. Stocks in the COMEX warehouse are down 3 million ounces since the last newsletter, to 112 million ounces. This indicates the physical market is getting even tighter. I think we'll see $7 an ounce silver before long.