Tuesday, September 09, 2008

Money down the drain.

Financial Sense
Real U.S. Housing Losses are in Excess of $6 Trillion
by Daniel R. Amerman, CFA | September 5, 2008

Actual losses in the US real estate market are much higher than what you
have been reading in the newspapers recently. Using a combination of
official government statistics and the most widely used index of housing
values, we will demonstrate that the US real estate market has lost a total
of $6 trillion in value in the last two years. We will show that an average
house that was worth about $226,000 in 2006 is, once you adjust for
inflation, down to a real value of only about $160,000. To put what a $6
trillion loss is into perspective, we will show that when all factors are taken
into account, the two year drop in US real estate values is equivalent to
wiping out the entire retirement savings of all 78 million Baby Boomers, and annual housing losses are close to the annual GDP of China...

...Let’s think for a moment about recent financial history. How about the collective “wisdom” of the markets pushing the NASDAQ to 5,000 – and then 80% of that value quickly imploding as the NASDQ fell to 1,000. Then there is this most recent episode, where it appears the collective brilliance of the markets ran up a little $6 trillion (and still counting) pricing mistake. Just a little rounding error, twice the size of the economy of China. Now, let’s think about the safety of your retirement and other investment assets. When you direct your IRA and 401 plans, when you plan your retirement income, what is your source of safety for your stock and bond investments? In the financial profession, your ultimate source of safety is what is known as the “Efficient Market Hypothesis”, which just basically says that the awesome wisdom and intelligence of the markets makes sure that all securities are always fairly priced.

Given what we’ve seen just in the last decade – how confident are you about this collective brilliance of the markets? Confident enough to risk every penny of your retirement savings? Yet, you must invest and invest well – or inflation will eat your savings, and you will be impoverished anyway. So, what do you do?

And that's the 64 million dollar question, isn't it? Our houses, which we were assured would "always go up in value" will take years if not decades to get back to just what we paid for them, much less turn a profit. And retirement portfolios? Well, turns out after inflation and the stock market volatility they aren't really all that hot, either. All those "no-fail" stocks and bonds did. We gambled with money we needed, and now it's gone, basically - returned to the void from which it sprang.

Or, if you prefer the more modern vernacular - down the drain.

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