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If the 1970’s taught us anything it would have been that war in the Middle East
was bad for oil prices, gas guzzling cars had a negative effect on the
environment, and dropping interest rates to increase consumer spending, so a
struggling stock market might be corrected, led to dire consequences. Maybe we
didn’t learn these lessons as well as we thought.
Culturally, the 70’s might be
known for disco music, the end of the Vietnam War and the very first Star Wars
movie, but economically it is known for a recession nearing Depression-like
proportions. In 1975, the Dow plunged 40 percent. Economists opened the money
floodgates by offering consumers the lowest short-term interest rates they had
seen in a decade – four percent – and encouraged Americans to spend and borrow
recklessly. They did.
Unfortunately, the dollar was losing traction in the
world market as gold and foreign currencies began to increase in value,
exponentially. In order to restore the dollar’s credibility, interest rates
soared. In just three years, rates went from a consumer-friendly 4 percent to an
outrageous 20 percent. As a collective gulp was swallowed across the U.S.,
President Jimmy Carter saw his ally, the Shah, overthrown in Iran and the
Soviets occupy Afghanistan. Military budgets and oil prices climbed dramatically
as Carter’s approval rating bungee jumped from over 80 percent, at the beginning
of his term, to a dismal 30 percent, at the end.
So what does that have to do
with the current state of the U.S. economy, thirty years later? In a galaxy far,
far away, the Sith may have gotten their revenge but there are certain parallels
on the home front that mustn’t be ignored.
Today, bouncing back from yet
another stock market slump, the dollar still struggles against Japanese and
European currencies, as well as gold, and some leading economists believe the
fed’s interest rates are not rising rapidly enough to combat the increase in
gold prices. A drawn out campaign against Iraq has led to further increases in
military budget as the specter of conflict with Iran and North Korea loom on the
horizon and oil prices continue to rise.
Are we doomed? Are all of our
investments going to collapse? No. Why? Because we survived the Seventies. We
even survived the Great Depression- and not even the most pessimistic of
economists is predicting that. The answer is, quite simply, patience.
As of
July 7, 2006 Freddie Mac’s Primary Mortgage Market Survey noted that the average
30-year, fixed rate mortgage was 6.79 percent. Freddie Mac’s chief economist and
VP, Frank Nothaft, stated that “this is fairly consistent with our economic
outlook, which continues to forecast that the interest rate for the 30-year,
fixed-rate mortgage will gradually drift upward, but should remain under 7
percent for the year.”
Dr. Mark Skousen, a professional economist, college
professor, and chairman of Investment U., an e-newsletter, writes that “real
estate has not declined due to rising interest rates” but for one reason,
“prices are simply too high for most investors to find any value in the housing
market.” Real estate guru John Schaub, a colleague of Skousen’s, agrees that
“most housing markets are at the top of a bull market run. Most markets will not
crash. Some will correct. All will produce terrific buying opportunities as the
amateurs are flushed out of the market.”
Fortune favors the brave, but there
is a difference between intelligent investment and a “grip it and rip it”
decision to purchase real estate. We must do our homework. USA Today reports
“while average hourly wages have risen about 20% since 2000, the national median
home average has soared 55%.” When a market becomes unaffordable, what else can
we expect from investors but a more cautious approach until the situation is
corrected? Yet, according to Forbes.com, the U.S. economy saw a 5.2% growth in
the first quarter of ’06, with a forecasted growth of 3.6% for the year.
Unemployment is 4.6 percent and the number of available jobs is at a post
recession high of five million. Perhaps the horizon is not as far away as we
think.
Baby boomers are retiring in droves, gold is at $634 per ounce and
needs to reach $2,062 per ounce to meet the 1976-1980 surge, and Bush’s approval
rating is beginning to rebound (at time of this writing). Real estate has
shifted toward a buyer’s market and buyer’s markets do not favor the brave, but
the financially diligent. Do the necessary homework and be patient in order for
your real estate investment to garner profit. Economic opinions vary, but many
agree that the housing market will bounce back to the proximity of its early
2000 boom. It seems investing in a home is still the most financially
responsible acquisition a person can make. Now that’s interesting.
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