What is the risk in purchasing in a declining market?
By Daniel at 25 November, 2009, 2:24 am
That’s the risk in purchasing in a declining market. When you buy a stock at $40 that declined from $80 that doesn’t mean that it can’t drop further to $20.
The tax credit has had the same effect as the cash for clunkers program. It lured some fence sitters to buy now for fear of an expiring credit so that the net effect was to bunch sales that started during the summer into an October closing date.
There are two faulty assumptions at work here that prospective home buyers should be cognizant of before making a purchase to chase after a tax credit. One is the assumption that the credit in and of itself will reverse the downward direction of home prices and, therefore, make it safe for a prospective home buyer to commit now. The reality is that there is a lot more supply slated to come onto the market over the next year than there are buyers to stem the tide. The credit is minuscule compared to the dollar volume of anticipated foreclosed home supply.
The second assumption is that the market is at a bottom. It isn’t, despite all of the happy talk surrounding the ongoing inflation of commodities and paper assets in the capital markets. The players pushing the prices of these latter asset categories are flush with cash from their own resources or if they are part of the banking oligarchy, from the Fed. Their asset plays are experiencing inflation while the consumer and his primary asset, his home, remains in a decided deflationary environment.
The consumer is financing the inflation in capital markets and extending 0% money via the Fed to the banking community through his and her tax dollars. And instead of drawing any benefits from that largess, they will soon be asked to pony up substantially more when increases in local taxes kick in. Also there is a good chance that there will be a move to repeal the tax cuts enacted under President Bush after the 1st of the year. If this occurs it will be portrayed as in accord with recent White House statements calling for greater fiscal discipline.
If the tax chicanery after the 1st should occur, it will have the effect of draining even more liquidity from the consumer while the Fed continues to flush its own with new cash. Mr. Bernanke and Mr. Geithner run a very real risk of overseeing the very lack of liquidity that was a hallmark of the 1930’s depression.
- Peter Von Nessi
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