Saturday, September 15, 2007

Should we worry?

To listen to the news, everyone would believe that this country - and real estate investors in particular - should be scared to death because of "all the foreclosures" that are pending, and that they will decimate the economy. But should we really worry?

I don't, and I will tell you why. But first let me remind you that I have been investing successfully in real estate for nearly 40 years. I've seen a lot of so-called trends.

Yes, there are a lot of foreclosures now. But before we panick, we need to take a closer look. Most of those foreclosures are people who bought above their means, using sub-prime mortgages that, until a few years ago, were not ever made available. Greedy lenders, preying on people who were eager to start out at the top with executive homes, made loans they should never have made.

What I am saying is this - the bulk of the foreclosures are due to sub-prime loans. And the important point to remember is that, among "normal" mortgages, the foreclosure rate has not changed. So, it is not the economy that is causing the high foreclosure rate. It is greed and foolishness.

If we remove the unnecessary sub-prime foreclosures that are artifically inflating the foreclosure rate, we find that the economy is quite normal.

Certainly, all those foreclosures will still affect the economy, much as any other abnormal occurence will change things temporarily. It is a lot like a nor'easter: when one rolls in, it causes quite a bit of damage for a day or two. But in no time, it is gone, and there is no sign that it ever happened.

Not to worry about all those foreclosures - at least not over the long term. It is temporary, and its effects will be limited. Unless, of course, you grabbed one of those sub-prime mortgages...

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