These two forces should weigh on home prices going forward, even if the economy recovers during that time. A lackl.u.s.ter economic recovery, naturally, will also throw cold water on the housing market.
But even after those two problems are worked out, there are five other reasons why the housing bubble-or any bubble-won"t be reflating any time soon.
Reason#3: Deflation Hammers Home Prices!
In the United States, consumer prices started dropping in 2009, with the first monthly year-on-year drops since August 1955. At the same time, personal income also went down. Wages came under increasing pressure as employment declined; in the first quarter of 2009, employment dropped by the largest amount since current data series began in 1949. Falling wages and prices are deflationary. Deflation is terrible for home prices; as wages fall, rents follow, and home prices tag along behind.
Reason #4: Inflation Won"t Help
Our current bout of deflation is probably going to end in runaway inflation. The federal debt is soaring to levels that would have seemed unimaginable just a decade ago. Through March 2009, the U.S. government and the Federal Reserve had spent, lent, or committed $12.8 trillion for the financial bailout.2 The $787 billion stimulus package almost seems small by comparison,3 but both the bailout and the stimulus will probably grow. As it monetizes its debt, the U.S. government will probably buy $1 trillion of its own debt in 2009 alone-talk about a snake eating its tail.
The federal debt was equivalent to 41% of GDP at the end of 2008. The Congressional Budget Office projects it will increase to 82% of GDP in 10 years. With no change in policy, it could hit 100% of GDP in just five more years.
This debt manifests itself as a flood of loose money sloshing through the system. When the economy compresses, that flood of money can be helpful. But when the economy bottoms and heads higher, all that extra money can ignite into an inflationary inferno-more money chases less goods, so prices ramp up and the value of the dollar goes down.
That means even if your home value goes up, it"s struggling to keep pace in real terms. And if your home price doesn"t go up, that will be even worse.
Here"s an example why: The Dow Jones Industrial Average hit 1,000 in 1966. It didn "t get there again for seven years, in 1973. The inflation from 1966 to 1973 was 37%. So investors may have made the same paper gains, but in real dollars, they were losing money.4
Reason #5: The Next Bubble Won"t Be a Housing Bubble
The implosions of the Tulip Mania in Holland and the South Seas bubble were not followed by reinflation of tulip prices or shares of the South Seas Company stock.
Likewise, after the dot-com bubble burst, the Nasdaq didn "t reflate. There are stocks from the dot-com daze that are far from their old highs, and we will likely never see those highs again. And some-Pets.com comes to mind-disappear forever.
Reason #6: The Fraudulent Good-Time Charlie Gravy Train Ain"t Comin " Back
Low interest rates were only one factor in the housing bubble; the other was loose lending standards. Heck, they weren"t just loose; there was wholesale fraud going on. Now, with regulators and Congress breathing down their necks, mortgage lenders are likely to b.u.t.ton up their standards tighter than a nun"s pajamas.
That"s a bit like closing the barn door after the horse is out, but it means the ingredients for a housing bubble just aren"t there any more.
Reason #7: The United States Is Getting Older
A great wall of baby boomers, born between 1946 and 1964, are approaching retirement age. The oldest baby boomers turned 63 in 2009, and when the trend peaks in 2030, the number of people over age 65 will zoom to 71.5 million-one in every five Americans. Old people don"t need huge homes.
How Long Could Home Prices Stay Depressed?
Maybe home prices will turn around in 2010, but I wouldn"t bet the farm on it. Maybe we"ll see home prices recover in 2012. Or maybe it will take a lot longer. Studies show that of the last three up-waves in housing prices, 1942 to 1956, 1975 to 1979, and 1985 to 1989, it took the run-up time plus 30% before housing prices started to move up again.
Since this last housing bull market went from (roughly) 1997 to 2007, then housing prices won"t start a significant run-up until 2020.
And what will inflation do to the value of your home by then?
Now for the Good News
If you can free yourself from the my-home-is-an-investment mindset, then you can approach your house from a fresh angle:* Your house is your home, first and foremost.
* Your house will likely be a refuge in a crisis. The grounds around it can provide a food supply. And there are things-primarily water and power-that make your home more livable than not.
* If you adjust to this concept, then any improvements you make to your house can be judged on the following criteria: * Will the improvement improve the livability of my home, or is it just an aesthetic change?
* Is the cost of the improvement going to be worth it in how much it improves my home"s comfort, security, and survivability?
* Am I actively making the changes my home needs to be a safe house in a crisis?
Using these standards, it"s pretty easy to decide between remodeling the kitchen and a solar-power electrical system. That doesn"t mean you can never redo your countertops. A new kitchen is fabulous (be sure to flip your hand in the air when you say that).
If you don"t have the money to make big changes to your house, don"t sweat it too much. Just make sure you have the basics-water (covered in Chapter 3), food (covered in Chapter 4), gear like electric lamps and batteries, and an evacuation plan in case you need to leave.
On the other hand, if you have the money, time, and inclination, you can make your home into a fortress that can ride out almost any crisis.
Intruder Alert! Protecting Your Home
Along with being a shelter, a home is your refuge from the turbulent world outside. And as times get tougher, it"s likely there will be more people trying to break into your home and steal your stuff, or worse. In this section, I"ll cover several ways to protect your home.
The first rule: Don"t make it easy for intruders to enter your home, whether they"re intent on burglary or something else. Intruders can access your house when:* Your door is unlocked.
* The doors can simply be kicked in.
* The door lock can be hammered until it simply falls off.
* Your lock can be drilled out using a power drill.
* The locks can be easily pried off with pliers or wrenches.
* The doorframes can be spread apart using a spreader bar.
* There are panes of gla.s.s in the door itself or beside the door. The panes can simply be broken before the intruder unlocks or destroys the lock.
Many of these problems can be fixed by installing a good lock with a deadbolt in your front door. And make sure that door is solid wood or metal, and the frame the deadbolt goes into is also solid and has metal strike plates.
For extra security on the cheap, you can install a bar brace. It isn"t pretty, but it will let you sleep well at night. A bar brace is basically a heavy, adjustable steel bar that wedges against your door at an angle so that it can"t be opened. These usually cost less than $25 and are easy to install.
Electronic Home Security Systems
The FBI estimates that a break-in occurs around every 16 seconds.5 You only have to be burgled once to decide you need a home security system. It"s best to get one before your heirlooms, electronics, gold, and guns are stolen. If we are in a worsening economic crisis, it"s likely there will be more burglaries. And a study in Britain shows that electronic alarms really work. Only 1.6% of households with good home security systems were victims of burglary. But 22.5% of households with little or no home security measures were burglarized.6 The home alarms most people are familiar with are perimeter systems-detectors or sensors placed on and around main entry locations such as windows and doors. These usually work using magnetic detectors, switch detectors, and gla.s.s break detectors for windows. The alarm will be triggered if any of the sensors detect a foreign presence.
Most home security systems are comprised of a control unit, detectors, or switches built into door and window frames that sense when the door or window is opened. These then trigger a siren or bell. Most sirens sound for 20 minutes and then shut off. Some alarms are connected to a monitoring service via phone line.
Wired electric alarms have their good points and bad points. The pros:* They"re inexpensive.
* They"re easy to operate.
* They will alert the police.
They also have cons:* Most require a functioning electric grid.
* While they sound loud, they don"t do anything to discourage a determined burglar.
* The time between alarm and police response is fairly long-long enough for a burglar to get inside, grab your most expensive stuff, and split.
Wireless home security systems have important differences. First, they"re battery powered and they transmit a radio signal to the control unit in order to trigger the alarm-no wiring is involved, so the wire can"t be cut, and these systems won"t fail if the electric grid goes down. Second, most wireless systems I"ve seen are do-it-yourself systems and are not connected to a security company. So there won"t be anyone picking up a phone.
Doing it yourself is cheaper over the long run (no monitoring fee), but you have a bigger investment up front. Going with a corporate provider is usually cheaper up front (they may even throw the system in for free), but it involves a recurring charge.
If you choose to go with an electric alarm, you"ll want to make sure the alarm you choose is loud enough. Anything less than 95 decibels can"t be heard from a distance.
Choose a big name for your monitoring (ADT, Brinks, APX).7 ADT is the leader in the industry and they have five interconnected monitoring centers throughout the United States.
If you want a better price, go with an ADT Authorized Dealer. They own their own equipment, so you"ll probably pay less at the time of installation.
An independent dealer (as opposed to a corporate representative) may also throw in extras to get your business-a free panic b.u.t.ton, motion sensor, smoke detector, or an additional door sensor-along with the main home security package. But you "ll never know unless you ask.
A good site for reading about home security systems is www.homesecurityguru.com. Another is www.securehomeadvice.com.
A Home Security System with Four Legs
There is a home security system that can be cheaper than an electronic alarm (not always) and is certainly more cuddly-a dog. Many burglars will ignore a ringing alarm during a quick smash and grab; they will not ignore a dog, and they usually won"t take their chances on one, either. For home security, you want a dog that sounds big and vicious. Teacup poodles and other tiny dogs are not effective home security systems.8 Other cheap home security systems:Lock the doors: Yeah, it sounds simple, but you"d be amazed how many burglary victims don"t lock their doors.