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One of the rallying cries of the housing boom that fed the frenzy was, “Buy now or you will be priced out forever” implying that those people that sat in the sidelines waiting for cheaper days would NEVER be able to buy a home because prices would only go up.

Today, home prices are dropping across the country but a funny thing has happened on the way to lower real estate prices - people ARE going to end up being priced out forever and here’s why:

The bond & credit markets are in total turmoil.  No one wants to lend money out because housing prices keep dropping and unknown volatility is making lenders skittish.

It’s not just skittish lenders though, with judges and congress threatening to put moratoriums on interest rates, offering amortization certificates, re-writing loans, or ceasing foreclosure procedures, you’d have to be an idiot investor to put money into financial institutions that lend out money as a core business.

Where will this lead?  Despite the Feds panic attack and extreme rate cuts, eventually the only way to attract capital back into the lending market will be to offer attractive returns through really high lending rates.   Who would buy a $200,000 home at 18% interest rate?

The net result will be people will be priced out of homes because they’ll be unable to afford higher interest rates and capital won’t be available unless it’s attractive enough (high returns) to offset the risk from investors.  It will be a much worse conundrum than the current falling home prices scenario.

So ironically, those who said, “You will be priced out forever” will be correct in the long run.  The smart move would have been to buy a sensible home at sensible interest rates and those days will be gone for a long long time.