The calm before the storm...

We must prepare ourselves as we come into this new realm of financial re-structuring and rebounding for our woes over these past 10 years in the global economy. Some say we’re all about to pay for the housing boom bust. See our previous entry Your Cup Runneth Over on how to handle this present and upcoming economic phase.

As the housing boom grew real estate agents, lenders, and members of the media hyped houses as if they were stocks. Numerous investors bought Pre-Construction deals only to sell out of their purchase option before the construction was even completed for a profit in places like AZ, Vegas, and FL. Some of this drive up was from the largest and richest demographic in our human history that began to prepare for their retirement. People were buying second homes and vacation homes in record pace as many homeowners came to believe they had an ATM in their paperwork or their own living room. They could use their living room to refinance and to buy their next home or down payment.

They found they could withdraw from the Bank of John Q. A house appreciating $100,000 could easily provide $60,000 through refinancing or in mortgage equity. Thus multitudes of people went out and borrowed in 2001 through 2005, more than $1 trillion. Lucky for them at the time, there was no end to the number and variety of nontraditional mortgages flourishing, the most popular being subprime adjustable-rate mortgages (ARMs). Now, don't get me wrong, there were many that had a rhyme and a reason to this type of action. There were those that were using this loan vehicle for investment rental homes, offsetting a great rate for a no money down purchase to offset their carrying costs for the first few years before they would catch up. There were also those repairing or renovating which used some of their appreciated capital for improvements to add even more value to their home rather than simple appreciation. However, leaving the upgraded nest egg on the table to offset this action is a more advantageous action. Borrowing against your local general appreciation with no other upside potential is where things began to get dicey for many.

Millions of people were buying in 2001-2005 with no little to no money down, and no work to do on the home as many of these were new structures yet continued to pull money out as they went. Now the monthly payments on about $600 billion subprime mortgages are increasing by as much as 50 percent because the two-year teaser periods are up. As we’ve seen after the last couple of months of the subprime situation, many of the recipients of these loans aren’t able to make their payments, or balloon payments so loans are defaulting and mortgage lenders are declaring bankruptcy. Now with them failing, and not only is the U.S. market suffering, but so are markets around the world. Some of the other markets in Europe have experienced housing appreciation and growth that makes the United States market gains look relatively small. The end is certainly near, and soon we will find that we won’t be able to refinance ourselves out of our problems.

We all must prepare and re-strategize our personal finances as money problems are just around the corner for practically everyone. This will be a good thing for everyone. We appear to have reached the end of the biggest bubble of debt and credit in history. This is not to say that there is still a large demographic, the baby boomers, that have made and structured plans for years that many are still on target with which will aid in keeping some of the markets going. Although, at this very moment, the public markets are teetering on the brink of a major change of direction. Five hundred trillion dollars in derivatives are on the edge and ready to explode. Fifteen trillion dollars in worldwide stock-market capitalization, if we do not pay attention, could disappear. The average American house could lose 20 to 40 percent of its value as, as many as five million families are forced into bankruptcy. Practically everyone is in debt. Much of this debt is home debt, which for all intense and purposes is considered "good debt", but this is also compounded with credit card debt. If you can't pay your bills there is no such thing as good debt or bad debt. Debt that is stuffed into hedge fund portfolios as an investment, debt that is laid away at insurance companies and pension funds as an asset, and debt that is traded, extended, and wrung out. It is debt for all seasons, all people, all times, and all places. All of our previous excess is bound to catch up with us.

Over the next few years, many people are going to be ruined; fortunes will be wiped out. However, as Enron fell, Google rose. As there are some that fall, new groups of people will acquire wealth and power, while some of today’s economic elites will be destroyed. But with a new understanding and diligence, we can avoid being a victim of history. We can be among the few whose investments go up when the great mass of people lose money. As a result, you will not only be able to safeguard your wealth, you will enhance your well-being and save your sanity.