Real Estate Correction, Credit Crunch

The stock market is at a major support area as I write this essay. The lack of knowledge and fear of the credit crunch problem has brought the market back close to the lows of the summer. There are a lot of variables and factors that must be considered in order to give a present condition of the economy. Investors are taking in many new variables and factors including the global growth story. Investors are considering the speculation of a peak in this great story of global growth and at the same time trying to figure the affect it has on a domestic slowdown.

The credit problem this country is facing is in no doubt a situation that needs attention and a solution, however we believe it is an over exaggerated problem. This credit problem has caused fear and housing sales to go straight down and inventories to be at all time highs, but the real estate market was long overdue for a correction. As I mentioned in recent essays the real estate boom was considered defensive and at the same time growth plays by investors on Wall Street who were playing the finance companies and the housing stocks. Also main stream real estate investors actually holding and flipping real estate were off guard when struck with this situation. The biggest hit has been taken by the average home owner sadly.

The largest purchase and investment an average person will ever make or has made is purchasing a home. How can you explain what has happened to the average home owner? Well let’s say your investment firm or whoever manages your 401k has taken 75% or your capital and invested in a high risk speculative sector. Now that would be a very scary situation. Who could sleep or function with such an ignorant move. Well this is exactly what mortgage and finance companies have done with the financing of homes; putting people in more home than they could afford or with adjustable rate mortgages, exotic loans, and any angle to get someone financed. Just imagine if a bank provided a $100,000.00 credit line with no credit requirements or income documentation and everyone was guaranteed approval, absolutely demand would go up, but in the end the product would inevitably fail.

Why is this situation being over exaggerated? Well the real estate correction is healthy for the sector and overall market in the long run. Another reason is that this correction was caused by irresponsible financing, and not caused by weakness in jobs or income. In fact the jobs number, income, and disposable income are all doing well. Real estate prices in effect were inflated considerably high, with the situation large numbers of people financing large loans and jumbo loans which were not sustainable. This problem can be corrected and prevented in the future. It should be a lesson well learned by the financials and perhaps everyone including investors and the average home owner. This also proves that a person must analyze their own finances and not always trust someone else especially with the largest investment they will ever make in their life time.

We have been writing about our overall bullishness of the stock market, and we still believe that these market sell offs are creating perfect opportunity for investing and future large returns. As far as real estate we are not particularly interested in this sector however we do believe that investments now in quality real estate and specifically commercial real estate, will produce large returns.

Bottom line, the credit problem/ real estate problem could be worse based on the cause of the problem, and in fact they have been in the past, but the real estate correction was long overdue and lessons were well over due as well. So in turn fear is only opportunity for great entry points in the market.

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