Thursday, October 26, 2006

The housing bubble and personal debt

Home sales fell another 1.9% last month (September '06) , and according to figures released yesterday (10/25), housing prices dropped a staggering 2.5% nationwide from September of '05, the biggest percentage drop in FOUR DECADES.

At the same time, David Lereah, chief economist of the National Association of Realtors has the brazen nerve to assert that the “The worst is behind us as far as a market correction". Mr. Lereah, as always, failed to present any factual basis for his assertion. Of course, his organization desperately hopes this to be the case, since they make their money off the percentage fee they collect from home sales. As such, Realtors would hardly seem an unbiased source for prognostications of home pricing trends, though you would hardly know this from the way Mr. Lereah is constantly quoted as an economic authority by members of our (lazy?) press.

How does this all relate to personal debt? Well, if you are considering taking out a home equity loan to put in that swimming pool or buy that new car, you might want to hold off until we have a more realistic idea of the direction the housing market will head.

Remember when you read the news and watch TV to consider the quality and bias of sources that are quoted, especially when it comes to the housing market. Neutral publications like the Economist, the Motley Fool, Money, etc, are all now projecting a long-term cooling and even possible major drop in housing prices.

Yet organizations like National Association of Realtors are claiming that we have reached the bottom. Of course, this same group has also claimed this every month since the market started cooling off. Furthermore, they previously claimed that there was no bubble at all and that prices NEVER drop nation-wide. Again, be wary of listening to forecasts from organizations that stand to lose from a drop in housing prices - they are have a serious vested interest in maintaining the high housing prices.

The truth is, NOBODY knows what direction housing prices will go. All that is certain is that prices are at historic highs, and no market has previously maintained such a level for long.

So be careful with home equity lines - using them as your personal cash machine could have dire consequences if (or, more likely, when) the housing market takes a further dive.


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