Learning from our mistakes- markets are indeed cyclical

The lessons that can be learned from the Great Depression, The Savings and Loan Crisis, as well as Japan's economic collapse of the 1980's, are essential if we wish to move forward to a stronger economy and better country. When the last up cycle was in full swing I remember trying to communicate that the market is cyclical and that we cannot have 20% appreciation forever, that interest rates are historically low and that the risk of financing a home using an ARM loan with a teaser rate is greater than most should take. Explaining that when appreciation dies down and rates eventually go up one has no insurance,no protection, and very few options. While with a 30 year fixed loan and an amortized payment that one can afford today there is a level of protection. Generally rents and incomes will rise, however, your payment will never change. Nevertheless, many were caught in the herd mentality and wild appreciation of the market. Of course we now see that the market is cyclical. Unfortunately, when in an up cycle people believe that the upswing is different. The link below was produced by National Public Radio offers a fantastic comprehensive overview of what created the credit crisis.

That being said, great fortunes are made in recessions, especially at the end of recessions. Many of the smartest investors have prepared themselves for the opportunities that will arise over the next two to three years. Orange County has a lot going for it including the relative affluence of the county, fantastic weather, and relatively strong economy. The question is how many people are living beyond their means? In general, I have seen a large number of foreign investors coming in and purchasing homes in Orange County, many call cash. Moreover, there was a home 3 weeks ago that was priced correctly and received 17 offers in 3 days. Will Orange County ever reach rental parody as some argue? That's a question that only time will be able to answer. Home prices will rebound, however it is important to take lessons from the current market and make sure we do not repeat the same or similar mistakes again.

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355

This program regarding the housing crisis explains the correlation between wall street and the credit crisis, why banks made half-million dollar loans to people without jobs or income, and why everyone is talking so much about the 1930s, and the giant pool of money that created this. Ironically the first interview was completed at an awards dinner for finance professionals who created the instrument that nearly brought down global economic system.