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Tuesday, June 07, 2005
Well Off and Homeless - A Paradox
The Great American Dream-a home of your own. There is a strange situation nowadays. Many of the middle class are homeless. That doesn't mean they are in the streets. They simply cannot afford a home at the prices which exist nowadays.
We are in a runaway market for real estate. Over the last few years the prices of homes have gone through the roof, particularly in the hot areas of either coast. Even between coasts there are great differences. Prices in New York City far outstrip those of Los Angeles. However San Francisco will give both a run for the money.
This is a very bad scene, particularly for the young. Definitely it is a problem for the up and coming young artists or even professionals. It is creating areas where children cannot afford to live near their parents, unless they move in. It is not good for the quality of life's diversification whereby whole areas have become so gentrified they can be afforded only by the wealthy. Rich ghettos are appearing.
What has happened is the pursuit of a lot of money for few objects, in this case homes. No inflation nowadays - that is a joke. The dot.com bubble bursts to leave many wondering where to invest. The stock market had lost its luster. When the Federal Reserve lowered interest rates to stimulate the economy real estate mortgages became very affordable. Further the lending institutions lowered their requirements to such an extent that many could buy a home without much if anything down. The financing was cheap. Large numbers of buyers chose an adjustable rate mortgage.
Now it looks as if a bubble is appearing. Many economists are predicting it will burst. Of course they have been preaching this for months. However when the shoe shine boys start talking about their latest real estate deal one gets nervous. Shades of the S&L crisis of a few years ago.
What is missing is the comprehension that home owning is not the same thing as playing the market. A home is a place to live, to raise a family, to be part of a community. The principle of home owning is not punting on the market. It is your most important investment financially and personally. If or when this bubble burst the cost is going to be far greater than financial.
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