On Monday, I talked about some of the negative lessons people, particularly those in my generation, are getting from this recent economic downturn. It is turning some of them off of investing for their future, which is not a good thing. (Especially as it is unlikely most of the workers in my age cohort will have pension plans by the retire, to say nothing of the shaky ground Social Security sometimes seems to be on.)
But, the ‘Great Recession’ is not all bad; if the press comments and spending data reports are to be believed, it seems that Americans have rediscovered how to be a bit frugal. Savings rates are up (only to about five percent, but given that it used to be negative, I’ll call that a win), frivolous purchases are down, and television shows that glamorized spending and excessive wealth have all but disappeared. This is all good, from where I stand, but I’m afraid that by the next time a boom comes around, the hard lessons learned over the past year will be forgotten.
So, just in case the economy picks up sooner than expected and people start to forget, here are some of the things you should keep in mind, all of which were reinforced by the ‘Great Recession’:
1) Prices Cannot Rise Forever… – Eventually, the prices for any highly desirable good get so high that new purchasers are unable to buy, or the supply created during the run-up in prices starts exceed the demand. In either case, prices eventually start to come down.
2) …Bubbles Burst… – If the prices of a particular good got built up dramatically, you end up with an economic bubble, which, like all bubbles, is very easy to pop. Just as greed and optimism can drive prices up, fear and pessimism can drag them down. Once the panicked selling begins, the bubble has already exploded and the bubble bits fall down to earth.
3) …and Real Estate is NOT Immune – If the housing collapse that triggered the current downturn had a catch phrase, it would be this: ‘But, don’t housing prices always go up?’ While that may be the case over the long term (as in, say, decades), that doesn’t prevent housing prices from shooting up and then dropping down in the short run, especially in localized areas. Consider real estate somehow impervious to market forces at your own peril.
4) Leverage Can Cut Both Ways – Yes, being able to borrow 99% of a house’s price makes it easier to get a house if you have little money. But, if prices go down by as little as 2%, you would find yourself owing more than the house is worth. That’s the downside of leverage; the higher the portion of an investment you buy with borrowed money, the smaller the price drop needed for you to be underwater (owe more than you could get by selling).
5) Having Credit Makes You Dependent on Your Creditors – When you have debt, whether a mortgage, student loans, or credit card debt, you have to play by the rules your creditors set out, from the interest rates to the repayment schedule. If the rules are all fixed ahead of time, this might not be so bad; but if your creditors can change the agreement, as with credit cards and variable rate mortgages, you make find yourself getting a raw deal.
There are plenty of other, more narrow lessons to learn from this downturn, from ‘Don’t expect to refinance your way out of debt’ to ‘Flipping houses only works if you don’t get stuck during a downturn’, but with any luck, the worst practices from this past boom will disappear on their own. Hopefully, these five lessons will stay in people’s heads for a good, long time.
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