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(By guest blogger Philip)

I just got back from a refreshing weekend in Santa Cruz relaxing, walking in parks, and playing board games with some friends. Good times. While we were walking we got to talking about buying homes. We’re all in our early 30s, and none of us owns a house in the area, but of of course we all want one. Our sanity has prevented us from buying anything in the late boom in housing prices because we can’t really afford it. Of course, that wouldn’t prevent a bank from giving us a loan or a realtor from pushing us into a place. It just means that given the size of our payments we’d have no fat to spare. We’d be at the mercy of the market doing what everyone was predicting it would do: go up. And it has gone up. We are even more priced out of the market now than we were a few years back and people cluck and wag their fingers and say they told us so. They tried to help us see the light. They really tried and if only we had listened think of how much equity we would have now that prices have soared from $400k to $800k. And they are right that that equity growth is really nice. Nicer than all the paychecks I have received in my entire life added together. However, that still doesn’t mean it was a good idea. It merely means it worked this time. Just because the U.S. central bank has kept interest rates at a dangerously low level to try and prevent the reckoning that should have come out of the dot com bubble, does not mean that suddenly everyone can afford million dollar homes in the long run. People have “leveraged” themselves with exotic loans and no savings. They are committed to loans with adjustable rates that even with the uncommonly low teaser rates they have are equal to their entire after-tax income for the next 20 or more years. This at a time when the average savings rate for the U.S. has gone negative for the first time since the Great Depression. The next two years will tell whether vast numbers of real estate owners are going to get burned. Leverage is something for high powered investors with levels of risk tolerance that a young family should not have. They have taken on in good times a bet they can’t afford to lose, while simultaneously not saving anything for bad times. Win or lose, it is a bad idea. And “lose”, it is a really really bad idea.

I want to rant more about this in different ways, but I guess I’ll split it into several posts.