All Bubbles Pop

Do you remember playing with the little bottles of bubbles? Watching all those bubbles drifting off on the wind, higher and higher. If you have had the opportunity to enjoy that experience, you are well aware of what happens eventually to all of those beautiful bubbles. They pop. It is the law of physics. The thin layer of soap grows thinner and thinner until it ruptures and just like that, the bubble is gone forever. Nothing remains except the air that was once contained inside.

Soap bubbles are not the only bubbles that we humans get the privilege to enjoy during our lifetimes. Thanks to almost constant government intervention throughout history, we humans have enjoyed the inflating and then bursting of many bubbles. The most recent being the tech stock bubble of the 1990s. When that bubble popped in 2000, it wiped out trillions of dollars in wealth and ruined what for many would have been a happy comfortable retirement. When the bubble popped all that was left was air.

Today, because of our glorious Federal Reserve and their mistaken belief that they can control the economy, we are watching one of the most beautiful bubbles in history drifting ever higher. That bubble is real estate and we all know what the law of physics says. All bubbles must pop. Make no mistake this one will pop as well and when it does, it will behave as bubbles have behaved throughout history. It will wipe out trillions of dollars in paper wealth and leave nothing but air.

From the numbers provided by the Mortgage Bankers Association, the bubble is still growing, just maybe a little slower. Mortgage applications are still increasing, the purchase index increased again, and the refinance index increased. Now, while the indexes all increased, the percentage of refinance activity decreased and the percentage of ARM activity decreased when compared to all mortgage activity.

With mortgage rates increasing steadily, why the continued strength? I believe there are a couple of reasons. First, people are watching interest rates rise and are afraid of getting nailed with huge monthly payment increases, so they are refinancing to lock in fixed rates. Second, I believe that people have run up large amounts of consumer debt again and are trying to get through another round of refinancing to pay off their high interest debt. Finally, it could be that people are so desperate for cash to support continuing consumption that they are being forced to accept higher interest rates.

But eventually the dance must end and the longer it goes, the more pain will be inflicted when the music stops. Russ Winter of Silicon Investor believes that people will buy in this housing bubble until lending literally seizes up.

Homebuilders are no help either. An astute businessman would look at the steadily increasing inventory of new homes and pull back. Sell off existing inventory and build cash reserves, but instead most home builders are of the "build it or die" mindset.

Despite or maybe in spite of all of this, there are signs of weakening. Lenders are offering amazing rates and terms on home mortgages. Builders are now buying existing homes in an effort to help homebuyers purchase new homes. While we can never know the exact top in the market or the moment when the bubble pops, we can certainly see the beginning of panic on the fringes of the market.

For you and I dear reader, the question is, what is your house worth? Is it overpriced and if the value of your house fell by 30%, would that put you in a negative mortgage situation? If so, you need to take action. In my case, I have 10 years left on my mortgage on a house that I intend to live in for the next 15 to 20 years or longer. Since I have a 15-year mortgage I am paying down the balance rapidly. If, for unforeseen reasons, I needed to sell my house in the next year or two, I could do so at a 40 to 50% discount and walk away debt free.

Whatever you do, do not consider your home a part of your retirement funds. It is not a liquid asset and it will undoubtedly become difficult, if not impossible, to sell in the near future. Plan accordingly. And whatever you do, get off of the refinance merry-go-round. It is a dead-end street that leads to financial destruction.