And You Thought the Internet Bubble was Big
The problem with a bubble of any kind is the speculative
excesses that take place in and around the bubble and ramifications
of unwinding these excesses.
Do you remember the good old days when you could buy any
stock related to the internet and have it go up from 100%
to 300% or more in less than a year. Remember stocks that
had no real business but still traded at over 100 dollars
per share and continued to move higher. You didn't seem to
need investment advice in those days.
The stock market moved mostly higher for two decades and
everything was fine until the extreme speculation began in
the late 90s. During this period, the stock market broke
from reality and took investors, institutions, and the world
right along with it. Investors only thought stocks could go
up and many of my friends left their careers to make a living
investing in stocks. ONLY to be back in their careers a few
short years later.
Institutions (which should know better) began taking companies
public that had no more than a business plan because investors
would buy it. Hey if the investor wants crack cocaine
just give it to them. Even the financial institutions that
spent years building investors trust, threw it all out of
the window to profit from the bubble that we all came to know
as the Internet or Tech Bubble of the 90s.
Although the fall out from the Tech Bubble was bad it was
not catastrophic. The economy went into a multi-year recession
and the stock market went into the worst bear market in over
70 years. Many retired people had to go back to work because
they invested their entire retirement plans in tech and internet
stocks. Pensions were lost and younger investors lost most
if not all of their savings. The GOOD NEWS was that for most
investors (even those that went out and traded on margin)
only lost the money they had to invest and when it was gone
the game was over. It does hurt to lose money but when all
of their money was finally gone but at least they did have
outstanding loans to that funded their stock purchases. Some
people did take out home equity loans to invest but those
instants were rare. They DID NOT have to pay a note with increasing
payments for their stock losses.
This little walk through the past was just a quick reminder
of what happened just a few short years ago. But more importantly,
it leads me to what I would like to talk about today. The
Real Estate community has a vested interest in being sure
that you believe real estate to be the only safe investment,
and that using other investment systems such as stock trading
systems from investment newsletters is "too risky".
The only investment advice they give is "buy more real
WHAT IS GOING ON TODAY IN THE REAL ESTATE MARKET IS MUCH
SCARIER THAN THE INTERNET BUBBLE THAT BROUGHT OUR ECONOMY
AND STOCK MARKET TO ITS KNEES.
The problem with the much publicized bubble in real estate
is that it involves a tremendous amount of leverage and borrowing
to enter the game. And just like with stocks, everyone is
getting into the game because prices are moving higher. Everyone
is now a real estate expert.
I knew trouble was brewing in the real estate bubble because
I ran into two friends in the last 30 days that I have not
seen in years and both have left good professions to get into
the real estate game. One gentleman had managed a BMW dealership
for the last 9 years and the other friend I saw at my 25 year
class reunion left a government job he held for the past 20
years to sell real estate.
Why is this bubble so much more dangerous than others
that we have seen? Good question!
Let me answer it with an example. If you buy a piece of property
for $300,000 and you put 5% down (in many cases now you have
to put nothing down) you then have $15,000 invested but are
responsible for paying the note on $285,000. Sounds simple
Most people who are playing this game are also using adjustable
rate or interest only loans because they just know they are
going to sell this property at a huge profit in a short period
of time and find another and do it again.
As long as prices keep moving higher everything is fine.
Just like the tech bubble
it is the greater fool
theory. As long as the next investor was willing to
pay more than you paid prices continued to move higher.
Even though most real estate investors do not think prices
can go down, what happens if they do? The other problem is
all of the borrowed money. If an investor cannot sell the
property quickly and the rates on the loan starting moving
higher (which they will) they are forced to pay more on their
In our example
lets say prices begin to drop.
They only have to drop 5% before the investor loses the entire
investment of $15,000 that was put up. Lets say real estate
prices drop 10%, now the investor has not only lost the original
$15,000 invested but will owe $15,000 when the property finally
The next problem is that most investors will not sell at
a loss. So now they are stuck with a property they cannot
sell for the price they want and now they have a mortgage
with increasing payments they cannot afford.
Remember that millions of people are playing this game in
the United States. It is the single reason our economy has
done so well over the last few years. It is also the single
reason that consumers continue to spend and take on more debt
because of the increased value of their own houses. It is
time that these people learn more about the reality of the
market condition, and look to other investment systems. We
hope to see more investment advice offer some safe haven to
those who have put too many eggs in one investment basket,
WHAT HAPPENS WHEN THE BILLS COME DUE???
Thanks to rock-bottom interest rates and easy ways to borrow,
consumers have been on an all-out spending spree for the last
several years. Now, though, there are signs that the bill
may be piling up too high. And what is really scary, interest
rates havent really started to move higher yet!
U.S. consumers are more vulnerable than ever to rising interest
rates. Nearly half of all consumer debt and 26% of all mortgage
debt are now adjustable.
When all of these adjustable rate mortgages begin to reset
soon, some of these people are going to see their monthly
payments rise by a several hundred dollars a month. That is
a real significant for all of those people complaining now
that gas prices have risen to over $2.40 a gallon.
The consumer, which is the engine to our economy, has been
living on borrowed time. They have overloaded themselves with
adjustable-rate debt on mortgages, home equity lines and credit
cards. If housing prices stop increasing, which is eventually
going to happen, they will be less able to tap into home equity
to help cover the bills. In severe cases, if consumers can
no longer afford their monthly payments, there will be more
defaults and foreclosures.
Our investment newsletters focus on properly diversified
investment portfolios, as this is protection against "Burst
SO WHY IS THIS PARTICULAR BUBBLE A PROBLEM???
Because our entire economy is currently being supported by
higher real estate prices! Consumer spending is being supported
by higher real estate prices.
The stock market is being driven by all of the companies
that support the real estate industry and all of the companies
that sell to consumers. They give single focus investment
advice, because of their vested interest in maintaining the
And now higher real estate prices are coming from pure unadulterated
And the speculators are so leveraged that they will not have
the funds to stay in the game once price appreciation stops.
Once the price appreciation stops and the monthly mortgage
payments increase, many of todays new wood-be real estate
moguls are going to be forced to sell at any price. This leads
me to believe that when the current speculation does eventually
unwind that prices could drop a lot further than anyone believes.
1) 40% of new home purchases are done by speculators
2) 27% of all new mortgages so far this year are interest
this compares to 1.6% in 2001. In the more expensive
markets they account for over 40% of mortgages.
3) U.S. consumers now owe over 11 trillion, nearly double
what they owed a decade ago
4) The volume of subprime (high risk) mortgages has soared
from $35 billion a decade ago to $530 billion last year
than 20% of all new mortgages in 2004.
Just like the old internet bubble days when institutions
sold billions of dollars of worthless .com IPOs to the
naïve public that could not get enough, today banks and
mortgage companies are doing whatever they can to lend money
to anyone and everyone regardless of whether they are qualified
Here is a quote for you that sums up the absurdity:
We dont want to stifle financial innovation.
This came from the associate director for Risk Management
at the FDIC in response to a question asking why no actions
have been taken toward tightening mortgage lending standards.
What happens when the last idiot pays the highest price for
a piece of property and real estate appreciation engine that
is keeping our economy going comes to a screeching halt?
The ramifications could to be a lot worse than anyone ever
The consumer will become so overextended with debt and debt
payments that they will be forced to finally stop spending.
Defaults, foreclosures, and bankruptcies will eventually cause
problems for our banking system (remember the old SAVINGS
AND LOAN DEBACLE
this is eerily similar). The housing
sector which has been an engine for the US economy will begin
All of these things will have a negative affect on the stock
I am sharing my views of what is currently happening in the
real estate market and with the consumer with the hopes that
you will be prepared and not fall into the same trap that
some many other smart people are getting sucked into.
Adversity creates opportunity
For investors who have the ability to look ahead. Try to
be Debt free and try to build you cash. There will be a tremendous
opportunity in the stock market and real estate once the correction
is complete. It may take a few years but if you have been
able to avoid the carnage and build your cash you will be
in a position to make huge profits in the future.
Look at how many great companies in the stock market fell
to unimaginable prices in the bear market that followed the
tech bubble. We have bought many of these fallen angles
in the MainScale portfolios and they have gone on to be tremendous
winners. We have seen no other investment newsletters who's
investment systems come close to producing results on par
with this portfolio. Check the commonsenseinvestor.com frequently
for investment information we have featured in our investment
Just like a good boy scout
BE PREPARED. A day of reckoning
is coming and if we are ready
major profits will follow.
Have a profitable day,