Faced with a speeding truck, what would you do?
The U.S. real estate bubble: are you sitting on top of it?
If this isn't a U.S. real estate bubble, what is? Media reports say a "modest three-bedroom home" on a postage-stamp lot in Dade County, Florida, three blocks from the water, goes for a cool $1 million these days, and that the county's tax base has increased by double percentage figures in each of the past several years.
Modest homes on both the American east and west coasts are selling at these ridiculous prices. A "modest home" is a detached bungalow of around 1,000 square feet located on a small lot.
Come on, people! This is insane! Those 1,000-square-foot million dollar homes three blocks from the ocean in Florida should probably be priced at $100,000. Think about it.
These are not palaces. They are comfortable, and keep the weather out. (But will they even be there after the next big hurricane or earthquake?)
These homes are the price they are because the Fed has been stimulating the economy for so long with cheap interest rates. Result: people have borrowed and spent. Credit cards are maxed out, and there is heavy secondary financing against the increased equity in these homes, some of that equity used to speculate on other homes, forcing prices higher.
People feel rich because they now live in a million dollar home, and even at the top of the market there is probably a buyer for it at that price, ergo it's really worth a million.
And when economy contracts?
But what happens when the U.S. enters the next recession or depression? When the economy contracts and people start to lose jobs? When buying dries up and homeowners can't meet their mortgage payments, especially if they have adjustable rate mortgages? When bankruptcy levels rise to historic proportions, putting more companies out of business?
Much of the wealth of private America is in its homes, not in other forms of investment or cash. High real estate values have led to a feeling of wellbeing and to some extent of complacency. With inflated-value assets, increased credit has been easy to obtain, and that borrowed money has mostly gone into consumables.
When the economy contracts (and it will, as history shows it always does), spending dries up. Factories cut back production. People are laid off, put on reduced hours, overtime disappears, and the average person has less money to spend. Some of the early ones may be lucky enough to sell their homes without too much of a discount. But the real estate bubble will burst. Make no mistake about it. Record numbers of people will simply walk away empty-handed from a lifetime effort to keep a roof over their heads. And they will still owe money.
No guessing here
There's no guessing about that. History shows that every time there is a real estate bubble, there is a high degree of speculation, and houses are frequently sold even before the most recent buyer has moved in. Hey, this is easy money – unless you're the last guy in line or you bought your house to actually live in it. Let's do it again. Let's borrow some more money and buy two or three to flip.
This is insanity. You know it. Any sensible person knows it.
But if you need proof, you can work out roughly what the price of materials should be in a 1,000 square foot house. If that's $100,000 including labor, is the plain postage stamp lot truly worth $900,000? (Construction costs in Panama can be as low as about $20 a square foot, depending on location and labor costs, but are generally in the $40 to $60 range, depending on quality of finish and fittings.)
Not normal circumstances
In normal circumstances, house prices don't really matter that much. The thinking goes something like this: This is our home and since we have no reason to sell right now, we will just sit it out and eventually prices will go back up.
But when a $100,000 home can be sold for $1 million, especially in a region prone to hurricanes that are forecast to increase in intensity over the next few years, some people may want to consider their financial options very carefully right now.
Yes, but if we sell our $1 million home, we'll just have to turn around and spend $1 million or more to replace it.
Think out of box
Not necessarily. Think out of the box. Let's suppose you have a modest three-bedroom home on either U.S. coast, and you believe, as I do, that we are heading for a real estate implosion. Suppose, also, you do not yet have all the money you would like to live your dream retirement lifestyle. If you could take early retirement, you could sell your home, pay off debt, if any, and move to a less expensive area in keeping with that dream retirement lifestyle. The new location could be within or outside the U.S., just so long as real estate values are considerably more realistic and the climate and infrastructure are agreeable.
If you plan to rent for a while, tuck the proceeds from your house sale into something safe. This is not the time to speculate in the stock market. If you want to do that, wait until after the crash.
Work keeps you rooted?
But suppose you are tied by your work to one of the bubble states for several more years. What then?
You will not find the answer pleasing, perhaps, but it's a lot better than enduring a 1930s-style economic depression and all the hardships and debt that go along with it. The solution: Rent. (Rents will also decline along with housing prices when the bubble bursts.) There are many other solutions, perhaps, but find other accommodation that you do no have to own at inflated prices. In a depression, he with the dollar is king.
If you want to remain in your old neighborhood, you can with the right strategy. After the housing market crash, one in which prices will tumble like dominoes when people all scramble for the exit at the same time, you might even buy back your original home for 20 cents on the dollar. And the bank will be relieved to let you have it at that price.
Trouble ahead for banks
Mortgage lenders are as greedy as speculators, and they will be in significant trouble – in fact, the entire banking system will be in trouble – when the real estate bubble bursts. This is not rocket science.
What will be the trigger for the collapse? No one knows the answer to this type of question, so when it comes it is always a surprise. In Holland in the 1600s, a foreign sailor asked why tulip bulbs were so outrageously priced. There had been speculation in them that bore no relation to their true intrinsic value. The market crashed overnight.
Will the trigger be oil prices? Crushing government and personal debt? Job exports? Increasing interest rates. Overseas competition? Possibly all of these? Or other causes not yet on the radar screen?
$1 million home for $50,000
It's my turn to ask: why is a modest three-bedroom house now worth $1 million in certain markets when the same house, with the same degree of comfort and convenience, can be had for $50,000 to $100,000 in Panama? And this Panamanian house will be constructed in concrete, not wood, in a country that is modern, democratic, safe, and where there are no hurricanes.
(In the urbanization projects on the outskirts of Panama City, on postage stamp lots, you can find new houses for less than $30,000, but that's not where most ex-pats want to live.) A fine new home in an area popular with ex-pats in the highlands of Chiriqui, or even along the Pacific coast in a gated community, can set you back less than $200,000, though prices are rising quickly.
Beach, golf for under $200,000
One developer, on property adjacent to the most popular beach resort in Panama, will build you a fine three bedroom, two-storey duplex or detached home for that price. And you have all the privileges that go with it: private beach club with pool, golf on a PGA championship course, free gas for appliances, 24/7 security, property maintenance, and the most sunshine in Panama. Oh, and if you are interested, the resort will look after the two upstairs bedrooms with separate keyed entrances and rent them from you for overnight guests when you don't need to use the rooms yourself. Some people pay off their mortgage that way.
Just imagine this: You sell your home for $1 million, and move to a warm climate (you can choose your year-round temperature in Panama simply by choosing the elevation of the land you buy).
Add $800,000 to retirment savings
You can buy a better property in Panama than the one you now own, and you still have $800,000 to add to your retirement savings. On top of that, there's no tax on foreign income in Panama, and the U.S. does not tax the first $80,000 of income made overseas ($160,000 per couple). The IRS even lets you deduct the interest portion of your mortgage payments here in accordance with your tax bracket.
Small wonder why Americans are turning to Panama in increasing numbers, and that land prices in many areas are on the rise and predicted to continue that way for some time to come.
Will Panama be hit in a global depression? Of course it will, though the result may make it feel more like a recession.
Shielded from global downturn
Panama is an attractive place in which to live in any economic climate. Panama's economy is not an industrial one, and that will shield it from the worst aspects of a global depression, although one important source of revenue, the Panama Canal, will probably see declining revenues.
If you are retired and your money is not in speculative investments, recessions or depressions will make very little difference to you, once you are out of the housing bubble. You may make your home here, but coincidentally you will make an excellent investment decision, too.
Choices? We face them every day. But most of us would move smartly out of the way of a speeding truck.