At the end of the date banking and insurance systems rely on fiat money being available to prop them up.

We’re seeing that now.

In my opinion, insurance is a big scam. As Chris Rock says:

“They shouldn’t even call it insurance. They just should call it ‘in case shit happens’. I give a company some money in case shit happens. Now, if shit don’t happen, shouldn’t I get my money back?”.

The better point is that if shit does happen why should insurance companies be allowed to increase rates to cover cash outlays for damages? Isn’t that why we pay for insurance? Haven’t they already assessed the risk when calculating the cost for insurance? If I get into a car accident and my insurance company needs to pay for damages, why should I have to pay more in the future for them to insure me? Isn’t that what I was paying them for in the first place? To cover me “in case shit happens”?

Sounds simple, eh? The demand pipe broke. Normally, there is a rather predictable number of first home buyers entering the housing market each year. It is pretty much like a flow through a pipe sometimes stronger, sometimes weaker but the size of the pipe is the same. Well, through a variety of factors, mainly via home lending mechanisms, the demand pipe broke and buyers flooded the market over a period of years. Why the flood of buyers all at one? Historic low interest rates for a sustained period of time. 100%+ financing, no doc loans, passing on the credit risk to others via CDO’s resulting in no underwriting standards, multiple home ownership, etc. These things caused a flood of demand for housing “all at once” (actually the flood took a few years). Instead of saving for 2-5 years for a down payment, everyone could buy now, why wait and save! Demand far exceeded supply causing rapid price appreciation which caused a frenzy and even more price appreciation which caused greed and even more price appreciation so the demand that would normally flow into the market was released all at once which caused even more demand. The demand pipe broke and so did the main pipe it was attached to. Housing supply could not keep up with this flood of demand so they kept building and building and building, bigger and larger projects were started to meet this demand flood. Now, the demand has been turned way down, both from the buyers with capital (they don’t want to make a bad investment and real estate is a bad investment right now) and from the lenders who provided capital to the buyers in need of it that are now requiring money down from buyers who for the most part stopped saving years ago when the 100% financing options were made available. The flow of buyers is now far less than the supply and the supply is still increasing to meet the previous demand. It took years to get the supply chain geared up to meet the flood of demand and now it will take years to get the supply down. In the meantime, the supply keeps coming and coming and coming….new home/condo construction, existing homes/condos (who needs three, four, five homes?), foreclosures (which are accelerating), etc. are all source of supply. Small demand (even smaller than before the demand pipe burst) and enormous supply equals a possible dip below the long term tend line. This is not good.

Crude concept but it’s key. So far money heaven has hit the banks, but the danger is if it hits you.

A lot of these buildings just have really high maintenance costs. This is nothing new, really. There used to be really dirt cheap ocean front condos not that long ago (pre-boom). The thing that made them expensive to own was the HOA fees. You’d be surprised how much all the amenities and maintenance really cost.

To Real Reality: Your $1M bet would be a losing bet even if prices hold steady. There are steep holding costs associated with owning a $1M condo that are much higher than renting. Subtract the cost to rent the same $1M condo from the cost to own it over 3 years. That is your loss if prices hold steady – not even counting the likely decline in prices.

That is one thing I forgot to emphasize: Prices DO NOT NEED TO DECLINE in order for you to lose money buying a condo right now.

Like I said above, if it costs twice as much to own as to rent, then you are losing that much money every month. In the case of million dollar condos, it adds up to a lot of money. Even if you are a cash buyer – that money is tied up in the condo and is not earning interest. If you don’t factor that into your financial decisions, then you need to read a Finance 101 book.

Anyways, I think that prices holding steady is the best case scenario at this point. A more likely scenario is that they fall quite a bit further. Either way, it is a loss – you’ll lose a lot of money or a ton of money, depending on what prices do.

TIMING THE MARKET

Regarding Kevin’s comment about timing: there was tons of talk about a bubble starting in late 2004. Maybe it wasn’t as prevalent on real estate blogs, but there were plenty of people talking about it all over the Internet and even the mainstream press, to a lesser degree.

And to the people that say timing the market is impossible – just look back at past real estate booms and busts. If you look at a historical chart of real estate prices in any market over the last 30 years, you will see several smaller booms or bubbles. They vary in their size. Thus, it IS hard to predict where the peak will be – that I will not argue. Sometimes a boom will last much longer than anticipated. The recent one was unprecedented in its size and duration.

However, in EVERY case, once the peak was reached and the downturn started, prices continued to decline or stay flat until they fell back in line with the long-term trendline. The long-term trend is dictated by the fundamentals (rent vs own ratios, median income, etc). We are not even close to that point yet in Miami – even considering the large price decreases in some buildings.

Again – prices do not need to decline for a condo purchase to be a losing investment. But it is far more likely that they will – compounding the loss.

I still see some of the bubble-era mentality left over in some of the antsy sideline buyers that post on this blog. They are afraid that they will miss the bottom and that the condo they want to purchase will be even more expensive if they don’t pull the trigger and buy soon. There is no need for that type of thinking. Take your time. Evaluate every potential purchase as simply a place to live – not as an investment. Forget about making money. If it happens, think of it as a bonus. But if you go into a purchase expecting it, you’re likely to get burned.