" Which means, prices go up by 12%, wages by 12%, homes by 12% but nothing has changed in the economy. "But inflation is an aggregate number, and not a uniform price inflator. Why would you assume that prices appreciate 12%? There have been several periods of time where prices are NEGATIVELY correlated to inflation BTW (sensitivity to high rates). Don't forget that RE has a sizeable investement portion that is theoretically forward looking. That fact much it much too complext to simply assume that RE follows inflation. "And banks aren't dummies??As if loaning and writing off non-performing loans off Enron, Nortel and a host of other bad investments in the past plus risky loans to home owners are a sign of excellent loaning practices "I wasn't talking about banks. I was talking about the ultimate holders of long term… Read more »

I wouldn't be surprised if, today in realtor school, they are not even taught the term "sub-prime" anymore, because in our "new era" of RE, there is no such thing as "unaffordable housing", except maybe for vagrants who live on the street. The banks are giving money away, the realtor's job is just to point people to that big pile o' money sitting there in the corner…I guess that's what makes people feel like Warren Buffett…Hey that reminds me of those irksome happy happy joy joy Capital Direct radio ads — from listening to the ads, one would think that being a HELOC provider is almost as virtuous as being Mother Teresa…

Freako,If nominal interest rates say are 16 percent, general inflation at 13 percent, the real interest rate is 3 percent. Which means, prices go up by 12%, wages by 12%, homes by 12% but nothing has changed in the economy. You consume the same goods that are produced as if nominal rates are at 6% and general inflation at 3%. And banks aren't dummies??As if loaning and writing off non-performing loans off Enron, Nortel and a host of other bad investments in the past plus risky loans to home owners are a sign of excellent loaning practices??The problem with being in debt in a low inflation environment is this. Long term rates can't go any lower. If interest rates keep going down, then it means the economy is in poorer shape than it seems. Japan had their 10 year bond… Read more »

"With rising double digit inflation, everything including your wages goes up as well."Your assumption is that inflation stays high for as long as rates stay high. But I know what you are getting at. Again, since those making long term loans are no dummies, there is no free lunch. Expected inflation is implicitly included in the rates (as made obvious by the fact that real interest rates are much more stable than nominal)."That's the power of inflation. In the inflationary era, corporate profits actually increase (because they can exercise good pricing power), thus giving the ability to pay workers higher wages. "But that means diddly squat in real terms, and real terms is what matters. Besides, wages are set by supply and demand, not ability to pay. Productivity gains are what we desire. The spoils of these get split between… Read more »

Something is wrong with their math..Did you know that it actually made sense to buy a home in the early 1980s with high interest rates? With rising double digit inflation, everything including your wages goes up as well. While the mortgage may look high when you bought a home then in the beginning, that debt is fixed! It might consume maybe about 50-55% of your net income in the first 5 years or so, but your income rises with inflation, so by the end of the 5 year term, your income is high enough that when you go through the next round of financing, your mortgage may only consume 20-30% of your net income. That's the power of inflation. In the inflationary era, corporate profits actually increase (because they can exercise good pricing power), thus giving the ability to pay… Read more »

I personally don't think that many people want to hear about the downside. I, personally, have given up trying to tell people that RE can go down. You might as well tell them that you have been abducted by aliens, because you get the same blank stare of disbelief. In the end, they are going to do what they want anyway, so why bother? The only time I will give my opinion is if it is asked of me, then I will choose my words carefully.I think the question could be asked in reverse as well. What about the people that try to pressure their friends into buying now at these prices? Are they guilty of perpetuating the bubble? Or are they just naive lemmings?

on topic: I'm all for letting people make their own decisions, as long as it doesn't affect me negatively, like vinelands parent example.

the psychology will stay until there are many LOCAL horror storiesSome of it will stay, but I hear some of it changing already. In the last year I know a few people who changed their tune from "buy now while you can!" to "Real estate here might not be a good investment".I do think there will be a critical mass that won't change until the bad news hits that prices have dropped year over year and are still coming down with underwater mortgages and foreclosures. That will be the point that pushes the market down further than it maybe should as specuvestors panic and we get more supply than demand.

I've given up on trying to warn friends and family, because they always do what they want to do in the end. I've even had to watch my words so I don't send my sister and brother in law (recent buyers) into a panic.I did manage to convince a cousin not to buy, but all that took was looking at his monthly payments vs. his monthly income and realizing that all he'll be able to eat is Kraft Dinner…. if he could even afford that!My wife has been a tough convert, a la 'Suzanne researched this' attitude. Over the last few months I have been teaching her basic economics and she is really starting to understand what is happening. She still desires to buy a home now, but luckily she is starting to see that she will do better long… Read more »

I agree that you have to let people do what they are going to do. I am not a professional, so I say little. Luckily my family is all settled and NOT in the Lower Mainland, but IF I saw my parents or siblings trying to buy a place here, and they couldn't afford it, I think I would at least point them to these blogs for a broader perspective and tell them to do their homework first. Why? simple, IF my parents sunk their entire savings into RE which then crashed, they would be living with me for the rest of their lives, which then would be my problem, so I would stick my nose into my business.

this house was on the market for about a week. the open house was a zoo and i felt totally pressured to make an offer. i've seen several zoo like open houses too, mainly on the East side,the owners were sitting around the living room watching as "crazed" wanna be home owners were eyeing the competition and checking out what was claimed as a "well maintained" family home….NOT!offers were to be looked at by 4 PM on the first day of the open house… surreal pressure…went home and had a stiff drink and then another one….i'm sure this "froth" is a sign of the top or near it, it can not go on like this much longer

WHY did you feel you had to warn your friends?To sum it up, partially because they are my friends, partially because they want me to join their RE religion and partially because I have seen this all before – just 7 years ago with stocks.The 'I told you so' plays a role too, since they completely dismiss what I tell them.

As an investor who has taken advantage of previous boom-bust cycles since the the late 60s, I'm extremely careful not to give advice to folks who don't want it. What's the point? unless of course they're young family members who deserve to have some common sense rammed down their throat.I don't know how much luck was involved, but by studying market cycles, economies and demographics, I've been fortunate to reap prfits beyond my wildest dreams since I started at age 20. The profits can be enormous, but so can the potential losses.Had I not sold substantial holdings fairly recently, I would be scared s…less of the current market. I think our market would be much healthier today, had it undergone a normal correction in 2004 instead of coninuing the irrational climb. With the downside far outwaying the upside, I can't… Read more »