June 10, 2007
The big problem with this stupidity of buying an asset based solely on the debt service cost (i.e. monthly payment) versus the asset's earning potential (i.e. rent) and potential net cash flow (rent income minus carrying costs) is that people assumed interest rates would stay abnormally and historically low, and that rental income on housing was irrelevant.
Well, I think we see now the folly of the current housing market. It'll always be the P/E stupid. And now that rates are rising, the proposition gets even worse.
It was a fluke that rates dropped so low these past few years. Thank you to the Japanese real estate crash, which forced the BOJ to take their rates down to 0%, which forced us (thank you 9/11 and Greenspan stupidity) to take our rates down to an insane 1%.
And thank you China for buying up our bonds to keep our interest rates abnormally low, and to manipulate your own currency so you could flood our market with cheap imports and crush our manufacturing sector.
Well, the days of stupid low interest rates are now over.
And now, the fools (as in the vast majority of people) who bought based on monthy payment and hope and promise of future price appreciation are about to find out what happens to payments (thank you ARMs) when rates go back up to normal levels, and appreciation turns into depreciation.
Hint - it ain't pretty.