Do you think three years ago anybody could imagine that we would be sitting here today contemplating the potential of a second Great Depression? Well, the unthinkable has certainly happened.
The numbers are simply staggering. A $700 billion dollar bailout in just the United States. The bankruptcy not of a company, not of an industry, but of the entire country of Iceland. An entire country!
Sadly, the worst is probably yet to come. Economics are all about confidence. Finance involves hard numbers, but it also involves the illusion of safety. Consider the simple issue of home values.
If you buy a home for $300,000 in January, a funny thing will happen. By June, it has an entirely different value. Has anything happened to the home? You might have made some minor improvements or had some problems, but the change is really about confidence.
If the home goes up in value by $100,000, there increase is a reflection of confidence. Confidence in what? In everything from the direction of the country to the prospects for the neighborhood the home is located in.
What if the opposite occurs? What if June rolls around and the home is worth $100,000 less than it was? Assuming no physical damage, this is again a reflection of confidence. In this case, it is a lack of confidence.
The current economic situation is nightmarish because of a lack of confidence. Do not get me wrong. There are hard reasons for the problems, but a lack of confidence is playing a huge part in the slowdown.
The financial meltdown is currently reinforcing itself. Every day brings worse news, which causes more fear and panic. Turning it around is going to be a bear, but it has to happen to spur some confidence that the worst is over.
Given these historically bad markets, is real estate still a good long term investment? Ironically, it is a great time to buy. Values are depressed. They will eventually bounce back. The question is when and how rough will things be till then?
How long will it be till real estate flips around? Nobody knows, but it does not look good for the near term. Money is just too tight. Banks are on the edge. They are holding on to any relief they get from the governments to boost their balance sheets.
Nearly everyone agrees we are in a recession at this point. Previous recessions have show a run time of between two to four years. What should you do? Cut costs and plan on living frugally for a few years.
