October 22nd, 2007
The Real Estate Bubble Bursts
Living through hard economic times can be more than an adventure in benefitting directly from the excesses of conspicuous consumption, it can also be a learning experience full of valuable life-lessons that fall under the heading of “Wisdom.” Gaining the knowledge and skills to survive and reconnect with the great adventure we call life is good for people.
I posted an outline of how to save a bundle on home appliances, transportation, health maintenance, clothing and incidentals, and exploiting alternative means of trade for the things you need and have to offer. It should be clear that it CAN be done. Less clear to the average person is why it may need to be done.
The current and coming economic recession is not going to be exactly like any of the recessions and depressions that came before. There are complex political and socio-economic reasons for this, not the least of which is the new network of world markets and new power distributions to consider. No longer are the nation’s debts and assets held in hock by our own wealthiest capitalist citizens. Today’s debt is held by other nations not necessarily benign towards us, and the value of our money is uncontrolled in that arena.
In our country the result of policies of “easy money” at high interest rates backed by diminishing reserves has led to a virtual collapse in the credit markets and the Big Banks (the Federal Reserves) are in trouble. Small business and personal bankruptcies are through the roof and the housing bubbles in much of the country have burst spectacularly.
Diarist “converger” writes a Warning: financial meltdown may be closer than it appears in mirror over at DKos. It’s a pointed analysis of private equity firm Kohlberg Kravis Roberts’ over-extension and pending collapse and what that means for its banker Citigroup. And, as usual, who gets to pay for the inevitable bail-out.
All of this revolves around the subprime lending market, and that is closely connected with mortgage lending – and Fannie Mae holdings.
People who hold most of the sub-prime mortgages at high compound interest are those who are among the first to suffer from layoffs and other job losses when the economy turns recessive. But neither banks nor their loan portfolio buyers and traders want your house or land. They want all your money. The number of unoccupied homes, homesteads and farms they own by repossession doesn’t count in their favor per financial solvency.
There is already talk about generating a fund to back re-negotiation of sub-prime loans so that homeowners in trouble won’t default and be tossed out into the streets. Interest rates may even be reasonable, lowering many people’s payments. In the end, it may drive many people into the alternative mortgage market.
For people who are here to investigate ways of living frugally but happily while still having some liquid assets to work with, the coming year should offer some excellent bargains on real estate. Whenever the money market declines, real property is a firm fallback position. Some of the very best bargains will be found (as they have long been found) in rural areas of the country, near small towns. Here you’ll have people who are subdividing ancestral land holdings in an effort to keep local business holdings alive. And it is here that the wise investor finds the ‘hidden market’ in real estate, part of the alternative economies, even while readily recognized in civil and magisterial law.
This is known as “Owner Financing.” When my family moved to our 10-acre mountain hideaway 15 years ago, we rented for seven years before finally buying. The guy we bought it from had purchased the place for $500 an acre back in the late 1970s, sold it to us in ’99 for $5,000 an acre. He financed for 15 years at a flat 8%, non-compounded. He gets a reliable monthly check for nearly $600, every month from April of 1999 to April of 2014. He has twice profited from his original investment – first on the market appreciation of the land, and second on the 8% interest we pay on that appreciated price. He won’t get rich on that investment, but he will get impressive return on his money. Well into his retirement.
Our land has been re-assessed twice for local taxes since we bought it. The taxes are still less than $300 a year, which is good. The actual lot price at the many mountain log home in gated community projects is $85,000 to $125,000 per acre. Without the house or any infrastructure, so we’re glad property taxes lag behind. We could not sell our property at those prices right now, or for as far as we can see into the future.
But if we could no longer afford to stay – we could offer our place at a mere $250,000, which is just $25K an acre. What a bargain! And we could owner finance at a straight 8% for 15 years, and get a chunky check every month well into our retirement. So far planned to be in a chickee on the beach on the Pacific side of Costa Rica, or on the open prairies of Alberta. Depending on the weather, of course…