Speculators Are Facing A Financial Judgment Day
Posted on February 22, 2008
Following the Great Depression of the 1930s, people were very fearful of any kind of debt. So many people lost everything that wasn’t paid for free and clear that debt was genuinely something to fear. For decades afterward, debt was viewed by ordinary people as a tool of the Devil, to be shied away from at all cost. They thought that only the foolish went into debt. Without going into detail about the cause of the Great Depression and its overall effects, let’s just agree that the generation of people who grew up during the 1030s and 1940s lived very frugally, and that they focused more on saving than on spending. If they did go in debt, it was rarely for something other than to purchase a home in which to live.
Today we have become a nation of debtors. In fact, the past couple of years our nation’s savings rate has been negative. People are spending more than they earn and going in debt to do so. The tumbling real estate market and slipping economy are putting an increasing number of people in financial trouble. Whether this is the precursor of another depression or not is debatable, but what is not debatable is the fact that as a nation, we are in a terrible financial mess that is likely to get worse before it gets better.
In an effort to stem the tide of recession, the Federal Reserve is drastically cutting interest rates in order to make it less expensive to borrow. Congress has passed a big stimulus package that will hand out money to encourage even more spending. Where’s the money going to come from? We’re probably going to borrow it from China and many people are questioning why we would borrow $168 billion from China to hand out to people who will probably spend it on things made in China. Whose economy is that really stimulating, ours or theirs?
I don’t mean to engage in a political discussion, but isn’t the real problem rooted in greed and impatience? The lure of quick riches preys on both of these emotions. The problem is, when something seems too good to be true, it usually is.
As a nation, we have ridden the real estate wave all the way to the beach and just like a tsunami; the wave has played itself out and is now leaving devastation as it rushes back to sea. In their exuberance, speculators rode the wave with little thought as to where it was heading or when it would beach itself. Now they are being battered and bruised financially and many are being pulled under as the wave retreats in its quest to return the market to balance.
Speculators are blaming the banks, real estate agents, mortgage brokers, the government and anyone else other than themselves, but doesn’t the real blame lie in their greed and impatience. No one held a gun to their heads and forced them to take out sub-prime and adjustable rate loans and other risky types of financing to speculate in real estate. Now, they are facing a financial judgment day? As the farmer would say, the chickens are coming home to roost.
Why should the government bail out people who get themselves into a financial mess? What if they went to a casino, got on a hot streak, and then let greed and impatience cause them to lose all their money on a single roll of the dice. Would the government bail them out? Of course not! It would be a tough pill to swallow, but they wouldn’t think of running to the government to cover their losses? What’s the difference between speculating in real estate and rolling the dice? Both are gambling.
Every time we’ve had one of these hot real estate markets, I’ve had hundreds of opportunities to make a quick buck, speculating. Webster defines speculate as “to buy or sell stocks, commodities, land, etc., usually in the face of higher that ordinary risk, hoping to take advantage of an expected rise or fall in price.” Buying, building, rehabbing or any other get-rich-quick technique that requires selling the properties in order to make a profit is speculating, not investing. Investing is buying properties for the purpose of generating an income. I’ve been investing in real estate for over 35 years and still own every investment property I’ve ever purchased. I’m not a speculator and as a result, I’ve never been hurt by one of these downturns like we are now experiencing.
Here’s a tip! If you can harness the negative influences of greed and impatience and replace them with the three Ds of success, Desire, Discipline and Dedication, the coming months are going to offer the greatest real estate investment opportunities we’ve seen in over a half century. But, if you’re still looking for a magic bullet so you can turn a fast buck, real estate is not it and probably won’t be for many years to come.
The shortage of buyers combined with an oversupply of product and tighter financing guidelines is causing prices to decline. As it becomes increasingly difficult for people to buy, more of them will have to rent and this will put pressure on rents and cause them to rise. The combination of rising rents and falling prices will produce some fantastic opportunities for true investors. As speculators face their financial judgment day, it will create a heyday for investors. Do you have the patience and persistence to take advantage of it?
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