Monday, January 12, 2009

Real Estate - Ponzi Scheme?

A true investment is when you invest in a business, whereby the business will produce a good or service, resulting in profits.  You get a Return On Investment (ROI) because the value of the business went up due to increased profits and wealth creation.

A home is a place to live in.  It does not create wealth.  A home does not produce any goods or services.  It is not a factory. It is not a service bureau.  It does not do any consulting.  It does not create wealth like a business.  Only businesses create wealth.  A home has its highest value when it is brand new.  Every year after that, it depreciates from wear and tear, unless the owner maintains it.  The reasons home price goes up is due to:
  • growth of a city, thereby increasing the value of land closest to downtown
  • speculation and bubble (Ponzi scheme)
A Ponzi scheme is similar to a pyramid scheme, where no new net wealth is created.  Both need an ever increasing number of investors or investments to provide a ROI.  When the scheme runs out of new investors/investments, or when investors pull their money out, the scheme collapses.

In this sense, Real Estate is the biggest Ponzi scheme in the world.  Its price goes up simply because more investors are coming in than going out.  Real estate agents used to argue that prices went up because of lack of supply (“they aren’t making any more land”).  This argument is proving to be false as prices are now collapsing in the US.  If home prices continue to go up, its just another way to take money from children.

The stock market is supposed to provide true investments.  However, it is also largely a Ponzi scheme.  Fundamental factors, such as PE ratios, Profits, etc., are dwarfed by Technical factors, such as speculation.  Every bubble, including the Dot Com bubble and the recent Oil and Commodity bubbles, is like a Ponzi scheme.

On this video:

Senator Chris Dodd was wrong about Fannie Mae and Freddie Mac creating wealth in Housing.

Dodd says: “a great source of wealth creation…has been home ownership…[which] created so much wealth for so many Americans”

A bubble is not wealth creation.  It is temporary fake wealth.

Politicians have defended the auto bail-out by saying that we must save this (fake) economy because we must prevent home prices from falling.  Why?  Is it because he is a home owner?  Doesn’t the government want to provide affordable housing for non-home-owners?  The only way society can prevent home prices from falling is to continue pumping the bubble.

Read more:
Bubbles - Extreme Maker and Breaker of Wealth 
Housing, the most manipulated market in the world 
Housing:  After the Bubble Bursts
Ban All Mortgages?


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