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Wo Can You Trust?

Written by: Bob O'Brien

Article Overview: Many so called experts droppped the ball on predicting the credit crisis. So if you can't trust experts to put out reports that are grounded in reality, who can you trust? The answer is you've got to educate youself.

Wo Can You Trust?

“Housing boom will not end in a crash, says Harvard”

“Although housing prices are stretched, it’s hard to see the catalyst for a crisis in the market”, says Nicolas Retsinas, director of the Joint Center of Housing Studies at Harvard. “The overvaluation looks pretty well balanced by longer term supports for house prices, so we may just see a few years with little action”.

The quote is from an article in the June 13, 2006, edition of the Financial Times. Harvard University published this report on the state of the US housing market right at the peak, during the summer of 2006. And the storied university concluded that the boom would not end in a crash and that we would just see a few years with “little action”.

If you’re pondering whether Mr. Retinas still has his job at Harvard, don’t worry. He continues to be gainfully employed and keeps publishing reports. Recently, his reports have been somewhat more pessimistic in nature, so he’s catching up with reality!

You would be forgiven for wondering what exactly it is Harvard is paying Mr. Retsinas to do. After all, in 2006, it wasn’t hard to find signs of an incredibly stretched housing market. Liar loans, NINJA loans, no money down and interest only loans were the norm of the day. House owners in California bragged that their homes went up $10,000 in value every month.

The only way the average American could afford a house was to either lie about their income or take out a high risk loan.

Mr. Retsinas, however, was by no means the only one to completely drop the ball. Countless so-called “experts” would regularly troll CNBC and other financial programs to ensure Americans that happy days were here to stay and that consumption is good and debt a non-issue. Many of the banks, rating agencies, mortgage companies and insurance companies made a lot of money in the short term but bankrupted themselves (if not the country) in the longer run.

The “little action” that Mr. Retsinas predicted has instead turned into a financial calamity of proportions last seen during the Great Depression. So if you can’t trust Harvard to put out thoughtful reports that are at least somewhat grounded in reality, who can you trust?


Back to Basics

The answer is you’ve got to go back to basics and educate yourself. Take housing. The 200-year average annual house price appreciation is about 1% after inflation. But in the period 2000-2006 US house prices more than doubled, according to Case Shiller. There’s no way that’s sustainable. It has to come down, unless you think we’ve suddenly entered an era different from the past 200 years. I wouldn’t count on it. What’s going on right now is a reversion to the mean. The bubble is deflating. We still have a ways to go but we will get there.

What’s true for house prices is true for the American consumer in general. For most of our history we haven’t had the luxuries of granite countertops, three car garages and private school tuition for our kids. The past few decades of avarice and conspicuous consumption are not the norm. That’s not to say that we will go back to the bread lines and 25% unemployment of the 30’ies. But we will have to make hard decisions again about “need to have” versus “nice to have”, and saving and frugality will make a comeback.

Our course on personal finance is designed to teach you exactly the skills necessary to survive and prosper, live within your means and manage your finances in this crisis and beyond.

The same analysis used for housing applies to the stock market. The average real annual appreciation of stocks has been around 7% over the past 200 years. In the latter part of the 1990’ies, however, stocks rose about 26% a year (from 1995-1999). That was because of the technology bubble and all the talk about a “new economy” and a “new era”.

The stock market bubble popped in 2000, and we’re still paying the price. Fortunately, the US market has already corrected and is now below the long term trend. But there’s no telling that it won’t go lower in the short run anyway. However for long term investors, the outlook is better than it’s been for decades.

In my next article I’ll talk about the US stock market and whether you should buy. And if you decide to buy, I’ll give some pointers on how you should go about it.

The history of mankind is a history of expansions and contractions, of great leaps forward and occasional tough setbacks. Part of the story is a repeating pattern of asset bubbles that inflate beyond our wildest dreams and enrich some, only to pop and cause ruin and distress for countless others.

The best way to survive these bubbles is to realize they are an inherent part of human endeavor. They inflate out of nowhere and grow furiously, only to pop when all the experts are calling for a “new era”. The trick is not to get caught in the destructive maelstrom. Educate yourself, live within your means, and plan for the long term. And don’t trust the “experts” who ignore history and proclaim that “things are different this time”. In the end, the world will work its way out of the current mess, as we’ve done before.


Andrew Hamilton Ph.D.
Contributing Writer
My Wealth

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Article Tags: banks rating, catalyst, cnbc, consumption, crash, financial times, happy days, harvard university, high risk loan, house prices, housing boom, housing studies, insurance companies, interest only loans, liar, mortgage companies, ninja, norm, retinas, us housing market
Referred by: http://www.mywealth.com



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