This is my column for this week from the Arizona Republic (permanent link). It’s important to understand that the long-run prognosis for the Phoenix area is good. We’re the fastest-growing major metropolitan market in the United States, adding 200,000 new residents a year. The short-run is not great, however, and the help the Federal government is proposing to provide will probably do more harm than good. Next week, I’ll be talking about some financial goals you can adopt to put yourself on a sound footing for the current real estate market.
For real estate in Metropolitan Phoenix, the pain of currency inflation may be enduring
The universal punch-line, the killer finish to an infinite number of jokes, might just be, “Sure, but it feels so good when you stop!”
If you had been banging your head against the wall, it might be true. For most things in life, though, no matter how painful they might be, the real pain doesn’t even start until you stop.
Want proof? Quit smoking. Smoking is a dirty, costly habit, we all know this. If you don’t quit, there’s a good chance it will kill you. But if you do, you’re looking at three truly agonizing days, followed by three pretty awful weeks, followed by three grim months. It might be three years before you’re complete rid of cigarettes.
The same goes for other physical addictions. The addiction can have painful consequences, but the sharpest pain comes when you go cold turkey.
This is exactly what happens to the economy when the Federal Reserve Bank stops inflating the currency. Practically speaking, we’ve spent much of the last ten years “high” on funny money. In consequence, we made “investments” that had nothing to do with anticipated returns, first with dot.com stocks and then with residential real estate.
Here’s the worst part, though: We’re not going cold turkey. A recession occurs when we wake up and stop despoiling the currency. The immediate effect is that the bad investments we made while we were drunk on free money lose their artificially-inflated value. This is very painful, but it only lasts about three years — eighteen months peak to trough, eighteen months trough to peak.
But instead, the Fed is attempting to keep the economy going with maintenance doses of funny money — sort of like the methadone treatment for heroin addiction.
Will it work? Maybe. The economy is out-performing currency inflation in many market categories. But real estate is not one of them. We’re already two years into our market correction, with no signs of a reversal in direction. So will the whole thing be over by this time next year? I wish I could say yes, but I don’t believe it.
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