"Kid, you're on a roll. Enjoy it while it lasts, 'cause it never does."
- Lou Mannheim to Bud Fox in the movie Wall Street.
Very true words spoken by a great character in a great film. Young stock broker Bud Fox (played by Charlie Sheen) loses focus on what's real and gets caught up in the world of all things fast and all things grey. Grizzled exec Lou Mannheim (played by Hal Holbrook) tries to drop some golden nuggets in Bud's pocket. Unfortunately Bud isn't buying it. If you haven't watched the film then please do to see how it ends up.
Now we've seen some pretty heady times over the past decade. In the late 1990s the internet sector was white hot. And the desire to get in on high tech riches drove the stock market indices through the roof. People threw money at companies without even caring if there was a business model. Everyone was in. The venture capitalists were in. The bankers were in. The street was in. Average Joe's were in thanks to online trading. The fundamentals were missing though. Too many companies. Too many crazy ideas being promoted by people who had no business running companies. It all came crashing down.
Money poured out of the markets. And then slowly the money poured into real estate. The internet stock bubble gave way to a real estate bubble. Conditions were ripe. Low interest rates combined with easy credit created a situation where people felt comfortable spending more money. Mortgage products got exotic to meet the needs of those who had little capital to play. Fixed rate mortgages gave way to 5/1 option ARMs with 100% financing. People got stars in their eyes and suddenly offering above the asking price became all the rage. Buying to flip became the rage. Everyone was in...again. Heaven help us.
Can you see the cycle? The eighties, the nineties, the two-thousands. Its all the same. Lou Mannheim's words fade away easily when dollar signs are in the air. So now we're in the third hangover of the last twenty years.
A lot of people have gotten banged up by this latest tumble in the bushes. Like the last one I know some people who are scratched and bleeding. For many people the situation is worse than that. And like last time its all their fault. You have to assume that the people at the banks are not your friend. They aren't looking out for you. The real estate agents are not your friend. They are not looking out for you. These are the two people you deal with (and rely on) the most in a real estate transactions. They just want you to buy and hopefully buy something expensive.
This whole mess was destined to occur once the banks started acting like parents who could care less about their kids' future. Here son, take the keys to the car and go joy ride. So people did. They took the crazy mortgages that were way too big for their incomes. They took the adjustable rate and interest only financing because, "You could always refinance to a fixed rate when the rates go up." There were so many winks I'm shocked that the stores didn't run out of eye liner.
So things got crazy and people forgot about the fundamentals. What's the use of having a huge house (or apartment) with granite counter tops, a viking stove and a jacuzzi tub in the master bath if the payments leave you gasping for air? And every night you go to sleep with a roulette wheel under the bed. Where will the ball drop? Interest rates rise and you get hurt. Demand drops and you get hurt. Unexpected situation requires cash on hand and you get hurt. Don't get me started on the people who already owned their homes and did cash out refinances.
I think I've learned a few things. I bought an apartment at a (semi) reasonable price with a fixed rate mortgage. And one day I woke up and thought I wanted to live more reasonably. So I sold the apartment, took my gains and moved into a rental house. No granite. No stainless steel. But we've got a backyard and the roof doesn't leak. And I've got money in the bank.
My message here is to trust yourself. Don't trust what you read in the newspapers where they hype the boom and then hype the bust. Don't trust the mortgage brokers who say they're here to help. Don't trust the realtors who encourage you to bid above asking price. What's the point of an asking price if you have to bid above it?
Always buy what you can really afford. Never, in any commodity, make a long term commitment with huge risk on the back end. Rising interest and negative amortization (meaning you don't gain equity with your payments) are huge risks.
Forget about what you want. Focus on what makes sense. If what makes sense is what you want then you're on the right track. If not, you are reaching down to pull out the brake cable as your car heads for the crest of the hill. If you do that, you will get banged up when the car goes out of control.
Young Bud Fox didn't listen. He assumed the risk on the back end. He played it to the edge and he eventually went over. That was a movie, but this is your life. So heed these words and you'll never have to worry about your roll lasting or not.
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