The Economics of a 'No Brainer'

It's a great thing when you're confident in your decisions. You research a situation, you ponder the evidence, you wait for the right time, and then you act. It's even better when time lends support to your actions. Buying a home, only to find that home prices have soared, helps you sleep at night. Investing in the stock market, then watching as your profits grow doesn't feel bad either.

Once the powers-that-be make it clear that the economy is strong and growing you can be sure that making a move is not risky. The chances of losing a job, and being out of work for very long are small and getting smaller because we're just a few months away from an increase in job creation. Now that it's clear that interest rates won't ever be this low again, you know that it's time to act.

But what happens when everyone is in on the secret? What happens when everyone "knows" that the surest way to make a buck is to buy a house - or a multi-unit building? When everyone "knows" that the housing market may "not always rise in value, but certainly won't decrease much"? What happens when interest rates are so low, that earning .4% interest in a SAVINGS account doesn't inspire you to sack it away for a rainy day? When everyone realizes that paying rent is "throwing money away"? And that if you act now, a few years down the line, your mortgage payments will seem much lower - because inflation alone is bound to boost your salary in the next ten years. What happens when everyone is confronted with a sure thing?

The rules change.

Remember, despite the clarity you've been granted, there are other people playing this game too. The reason you're making your move now - buying that house, or buying Yahoo - is to stay one step of the next guy. Sure, you could wait awhile - rent a little longer, earn .4% interest like a sucker. But the reason your house or Yahoo will be worth more next year is because that's when the 'other' guy will wake up and see that he's about to miss a big opportunity - and do anything to get in on the action.* Every minute you don't act is a bargain lost. Your decisions were shaped by the facts at hand. But you're not the only one reading the papers now.

You "know" the house you're about to buy will double in value in 10 years. But what if the seller knows that too? What if he's heard that interest rates are the lowest in decades, and that it makes it easier for you to pay the mortgage? Don't you think he's feels entitled to benefit from the miracle of home ownership, and so charge you a slight premium for letting you in?

The rules are going to change.

Remember hearing about so and so's grandparents? The ones who never bought a house because they thought it wasn't right to buy something with money they didn't have? They never could feel comfortable with debt, and here they are 40 years later still renting. They grew up with a different set of rules. Those rules changed, and no-one could convince them how silly they were. They missed the boat. They didn't realize that the rules had changed, and the right way to succeed was to borrow.

They rules didn't change overnight. Interest rates had to fluctuate, circumstances changed, and minds had to bend. But eventually, it happened. Everyone has been converted. Everyone has seen the light. But what now? When everyone owns a two-family house, who will rent from you? When everyone owns Yahoo, who will buy your shares when you wish to cash-out and finance the yacht of your dreams? The rules will change again. But don't expect to get the memo the day it happens. Monday won't seem much different than Sunday, and February might seem just as cold as January, but they'll change at some point.

You made your decision because you believed you were smarter than most others, but baby's all grown up, and wants to get paid. Those historically low interest rates don't make it easier to pay your mortgage, they make it harder to find a good price. Those rising prices don't ensure a retirement nest-egg, they ensure you'll pay top-dollar for the privilege of the obligation to pay the bank for a house that no-one is required to buy from you. And if you do sell at a huge profit, you have the added benefit of being able to move into a home that has also sky-rocketed in value BEFORE you bought it.

Negative numbers exist, and one day people will become more familiar with them. Prices are determined by the people that sell - NOT the people who hold. Even if you feel you could live in your beautiful home for the rest of your life, even if you feel your house is worth a million dollars to you, and even if your job is more secure than Fort Knox, prices are subjective. If your neighbor looses his job and needs to sell, he needs to convince someone else to buy. If everyone has long-since been clued-in to the marvels of home ownership, and hence already owns a million dollar home, he may need to beg someone to buy it. He may have to sell at price that's below the market, or maybe even at a loss. The price of homes in your neighborhood have just gone DOWN. The unthinkable has come to pass, and you never saw it mentioned in the papers.

No worries. Your home is comfortable, and they need you at work. A few neighbors may have been desperate to sell, and brought down prices for a time, but you're in it for the long haul. Home prices ALWAYS go up in the long run.

But maybe only some of the rules will change at first. You might notice more and more people renting-out their basement, to help with the mortgage now that they've only got one paycheck coming in. Word gets around that renting in your neighborhood is a bargain - or maybe in someone else's neighborhood. Suddenly fewer young people are in a hurry to get that starter home. They can save for an extra year or two because rents have come down, and they find they can afford a rather large apartment because so many homeowners are eager to supplement their incomes. The drop in rents writes the first rule to change. It makes ownership of rental units less attractive, and you watch a vicious cycle take hold, like that swirl in the drain that picks up momentum and finally signals that the clog has cleared.

You used to get unsolicited calls from real estate agents. They knew you weren't looking to sell, but they used to let you know that if you ever wanted to, you could make a bundle. Those calls have long-since stopped, and they've recently been replaced by stories of friends of friends who tell you that they've found a house to rent at a fraction of your mortgage. That's great for them. You can't begrudge them a good deal, and besides, your home is comfortable, and your job is fine.

Those stories multiply, and soon everyone is looking in the mirror and asking why they're still paying the mortgage of a billionaire, but only living like a millionaire. You start to wonder why you don't walk away from it. Sure, you've built-up lots of equity, and in a few more years you'll own it outright, but what's the point? You could rent a place TODAY, thats just as nice, without the obligations of a mortgage.

The story goes on, and it gets worse. Use your imagination. Imagine how millions of people will react to reality as it unfolds. They've each got their own interests at heart, and not so long ago it seemed clear how they would act. When reality seemed to follow a pattern it was all so clear.

The accuracy of the preceeding scenario is not at issue, it's the plausibility. The 'No Brainer' of home-ownership, and stocks-without-earnings will one day seem not so obvious. The predictability of any market is an illusion.

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