If you want to know what an economic bubble looks like as it is occurring, keep an eye on the real estate market.
The landlord that I rent office space from is, I'm guessing, about 50 years old. He was born in Iran and left Iran around the time the Shah was overthrown. For most of the more than twenty years he has been in the United States, he has been in the garment business. Women's dresses, I believe.
It's a tough business, he has told me.
About three years ago, he decided to leave the garment business to enter the real estate market full time. His experiences can attest to the fact that we are certainly in a Bull Market in real estate. About six months ago he bought a building in downtown Los Angeles for $4.2 million. He was just offered $9.6 million for it.
I told him to sell and put some of the money in the bank. "This is a real estate bubble. When interest rates start to climb, the bubble is going to burst," I said to him
He nodded. "I may sell but I have to put it back into real estate, otherwise I will have a huge tax bill," he said.
What a scam, I thought. I know the government for decades has been promoting the real estate market, but here is the icing on the cake. Yeah, you might make some money in the real estate market, if you catch the cycle right, but if you try and take some out, the government is going to take a good chunk of it. Roll it back into real estate and the government won't mess with you for awhile.
An ex-girlfriend of mine called this week. She recently moved to Houston. It sounds like things are tight for her. Instead of renting, she decided to participate in the Great American real estate boom and bought a condo. And it sounds like she has bitten off more than she can chew, as far as the mortgage payment. She doesn't seem to like Houston either. She's a real looker and when she is not falling for the rap of an economist, she tends to date athletes and sports agents.
I guess it is a further sign of the real estate crazy times, but she informs me that she has her eyes set on some Houston real estate developer.
There is real estate talk everywhere. Just yesterday while at a pizza joint, I was eavesdropping on the conversation at the table next to me. There were three construction workers at the table and, surprise, they were talking about their homes and real estate in general.
Apparently one of the construction workers comes from the old school, when he asked one of the others, "How many years before you have your mortgage paid off?"
The other construction worker replied, "Oh no. I am not going to pay it off. I am going to use it as a cash cow. Every few years when the value goes up I am going to take the money out (by borrowing against the increased value)."
I'm looking at these construction workers and thinking to myself, these guys really have no clue as to what is going on.
Alan Greenspan is pumping money into the economy, and especially the real estate market, at double digit rates. He has been doing this, almost non-stop, since he became Fed chairman in 1987. This means he has been doing this roughly 17 years. Pumping money for 17 years is a long time to pump money. At some point in time price-inflation will kick in, regardless of how much more productive the overall economy has become. And that some point in time may be now, given the falling dollar, rising oil prices, rising steel prices, rising rubber prices and the general rise in commodity prices.
The commodity price rise is only likely to get worse. And when things get worse on the price-inflation front, the Fed will slowly start to raise rates and slowdown the flood of easy money. And that's when all hell will break loose.
The construction worker who is using his home as a "cash cow" will get laid off, since the construction industry is all part of the mega real estate industry that Alan Greenspan is now fueling with easy money. He won't be able to find comparable work, he won't be able to make his mortgage payments, the debt on his house will be more than the declining value of his house. He will file bankruptcy and lose his "cash cow," i.e. his house.
My ex-girl friend works in the automotive industry, which is another industry that is always a major beneficiary of an easy money environment. She will lose her job, also file bankruptcy and dump the Houston real estate developer (who will certainly have plenty of financial problems of his own). She will probably end up marrying a .250 hitter from some major league baseball team.
My landlord will come to regret the day he didn't pay the taxes on his gains and put some money aside. If he thinks the garment business was tough, wait until he sees what happens to the real estate market once Alan Greenspan turns off the monetary spigot.
There are many, many sad stories taking shape during this Alan Greenspan inspired Real Estate Bubble, I hope your life won't be caught up in one of them.