johngonole

How Ivory Tower Economists Created the Housing Bubble

I did a cash flow analysis on purchasig a property to buy and then rent out back in 2003. I'm conservative but I think I assumed 0% price appreciation. The annual return on my investment would be lower than what I could expect from the stock market, bonds, etc.. without any worries or work. In the end I decided to wait for prices to fall before investing in real estate. Bad decision since prices went way up due to the Fed etc... Return on investment could be helped somewhat by increasing the leverage (that is putting less down on the property) but if one analyzed it as I did with the idea of paying down the property quickly the rent/price ratio said it was a bad move or at least a lot of work for little gain.

Your article is right on the spot about the deceptiveness of the inflation numbers and it is what led to the Fed deceiving themselves or self deluding themselves into the idea that ultra low target interest rates were a good idea. They were not. I think of course they knew this all along but at some point the Fed and the government thought risking any recession at all was a bad idea. Mild recessions are good in that it should be part of the natural cycle where consumers and businesses eliminate debt. Of course this reduces the money supply which creates deflation. The Fed has an unhealty fear of deflation. I think this phobia will eventually cause a huge deflationary spiral once people a business borrowing capabilities are simply tapped out or they will simply print the money to zero.

Without the assumption of real estate property appreciation most would have stopped investing in multiple properities to rent out back in 2003 as prices were even getting high back then. The rent was simply paying for the costs. Any profit was locked into the real estate appreciation and it became a self fufilling prophecy backed by easy credit and speculation frenzy. Now that has to unwind and it I personally think it is going to be paid for by the savers and those with assets based on the dollar. The govt and the Fed always screw the responsible class thus creating more irresponsibility.

The article was right on.