Boom or Bust ?

Neither. But that is the question on the minds of erstwhile Cape Cod homeowners. Recent reports of the imminent demise of the real estate market are greatly exaggerated. Even with average house prices breaking the $400K mark in some towns on the Cape, this real estate boom is different than the last one. It's based in equity instead of debt.

Many of you will remember the last boom. Lots of condominiums were being built and purchased for speculation around here. And the financing was easy because, hey, the sky was the limit. But now, the signal has come from California, that alot of really big houses are being bought and sold for speculation. Ala the internet stock boom.

But on Cape Cod for the last 10 years or so, lenders have only been lending at about 75% of valuation, with strong income requirements, for non-primary residences. Very unlike the last boom, when even the average investor was buying a condo for speculation and developers were typically getting 90 -110 % financing from local banks.

But most of our recent real estate boom, and the resulting rising housing prices, has been due to second home buying with cash, mostly because of wealth passing between generations and/or the tax cuts for upper incomes.

The great movement of money in this country is between real estate and the equity markets, with short stops in the debt markets (treasury bonds) along the way. We are seeing one of those transitions right now, helped along by the Federal Reserve Bank.

Money is moving back into the equity markets (stocks and bonds) because interest rates are rising. (Real estate prices are inversely related interest rates.) The Fed is raising rates because it is worried about inflation. Well not really. They are beholden to the money changers, the guys that make money when the shift is on, in either direction, and it's, well, time to make the donuts again.

That's what makes this country great. This elite group will always make their money off the top, because they actually get to decide when it's time, in other words, safe, to do so. They decide when the markets get to move, and in doing so, get to scrape the fat off the top of that market, in this case the real estate market, before the much smaller kids on the block figure out what is going on. And changing interest rates is the mechanism that signals the shift is on.

But, I digress. The point was, money is moving from real estate to equities, and the real estate market is flattening out as a result. But real estate valuations this time around, are relatively safe because with the new rules, this time we bought with cash instead of debt, we have safeguards against the bottom falling out.

So, you don't have to sell your house to preserve the equity you have in it. But don't buy that empty house on the beach thinking you're going to make some money if you just hold on to it for a while. And for those of you who like to speculate, it's OK to call your stock broker again. Come on, you know you want to.