“Getting off financial steroids will not be easy for any of us.”

From the NY Daily News:

Feeling pain of real estate on steroids

Once in a generation, an event occurs that changes the rules of investing and the way we live. Some are massive events, like the 1929 stock market crash. Others are incremental, like the increase in interest rates in the 1970s.

It is always difficult to know when rules are changing. Except for watershed events, changes are not made instantly. Behavior is difficult to modify, and many investors remain in denial as the world around them is transformed.

I think this could be one of those times. For the past few decades, one sure rule was that people could always make money in real estate. The stock market could go up and down, but real estate was a sure thing.

Our economy has lived off gains in real estate. People took profits from their homes and bought more expensive homes. They made lower down payments and took out adjustable rate mortgages, some of which initially required only payments on the interest. Then they took out home-equity loans to buy big-screen TVs and clothes, and to pay for vacations.

This easy financing for real estate was the steroid that boosted our economy. While most people complain about Barry Bonds allegedly cheating the system to hit home runs, few complained when each of us took financial steroids to boost our real estate. While most want baseball to outlaw performance-enhancing drugs, most also want the government to step in with performance-enhancing financing.
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This is most critical for real estate. My view is that real estate in general will be flat for at least the next decade. This does not mean every piece of real estate. Just as there are great stocks even in a bear market, there will always be great real estate investments. But I believe most people will not see the value of their homes appreciate over the next decade.

This means people should be cautious about buying too large a home or taking out a mortgage that’s based on being able to sell the home for a much higher price.
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The government has lots of tools – it can offer cheap mortgages and prolong the day of reckoning. But eventually the bills will be paid and the economy will have to get off the steroids of cheap money.

Bottom line: Don’t borrow too much. Don’t reach for real estate you can’t afford, and don’t spend now in the hopes you can pay later. Getting off financial steroids will not be easy for any of us. It will be more difficult for those who ignore the warnings.