(Economics it like biology far too complex to understand as a whole, but like biology patterns emerge and pathways can be isolated. That is why I love economics; it is so easy for the biologist to understand. Now before you alter your investment portfolio, I have had precious few economics classes and never worked for the Federal Reserve.)
Unless government spending goes up and fuel prices go down, very soon we are headed to hard times. I figure if you can see something is a "bubble" there is enough doubt to pop it. So, suggest you don’t buy a house for awhile, unless you are sure you will be in it long term and get a fixed rate mortgage that you can pay. Otherwise I advise saving and waiting especially if you are in a bubble area. If you are in an apartment that is cheap you can save up until it is a buyer’s market and get a better house and make a bigger down payment, then buying a house now that you can't afford and possible seeing it not appreciate in value fast enough to beat interest rates.(A bigger down payment is money in the bank, if you borrow $100K at 5.75% for 30 years you pay $583.57 a month for a total of $210,085, but if you borrow $80K at 5.75% for 30 years you pay $466.86 a month for a total of $186,069 which when you consider the $20K down saves you $22,000 dollars over the life of the loan. This is money in your pocket every month for 30 years and big money when you sell.)
However, if you are in an apartment now and don’t plan to get a house that is good too since it is harder to raise the rent on you if lots of people suddenly find themselves in need of housing. Yes, you have no equity, but you also have less risk since you aren’t responsible for maintenance, so if you are living check to check in an apartment a broken appliance isn’t your concern and so won’t be the straw that breaks the camel’s back. If you can rent a house do it, that way if you decide to buy you might be able to weasel some of you rent money as equity in the house (but don’t count on it) or if the owners do bankrupt you can make an offer to the bank to pay off the loan and get the equity back that way. (The karma implications of doing this are substantial, so consider that you are doing something hoping that someone else suffers.) Home equity loans are like financial suicide, of you sell your equity to pay high interest debt and you default (or the bubble bursts and value of your house falls) you lose your house, your equity, and still owe money! Yes, if you have debt and must refinance don’t get adjustable rate loans, interest rates almost certainly go up in the next few years, so you might go from 4.5% to 7% or more. The last time we stagflated interest rates were in the teens.
This piece of advice you should take with a huge grain of salt, if you have extra money that you can either save or pay credit card debit, I say pay the debt. Why? The bank gives you 3% interest but the credit card company charges between 9-20%, so while it is riskier than money in the bank, you save money on interest and restore your emergency borrowing power. Why is this riskier? Because it requires huge amounts of discipline and chances are you built up high credit card debit because you lacked discipline. To do this you must have enough savings to at least make the minimum payment every month no matter what happens because defaulting screws you more than you can imagine. So, I will waffle here a say you should balance savings with paying high interest debt.
Start cutting expenses now, if you spent $8 on coffee a day, stop now before you have to stop. With less than a month of savings you can buy an espresso machine and make better coffee for less money. Eat in more, even if you buy high priced groceries, it is still cheaper than eating out and probably healther too. Invest in "money saving" things, like the espresso machine costs $200 but with coffee costs and drinking 2 cups a day you save $1,500 a year vs Starblanks. Or if you don’t have one, buy a washer and drier. Say it costs $1 for wash and dry a load of laundry at a wash place, well your $500 Sear’s washer and drier only cost you 25 cents each cycle, plus no getting to and from the place so more savings. Even so it only takes 650 loads of wash to pay it back which at 4 loads a week is less than 3 years considering only a 75 cents savings per load. Remember the savings are money in your pocket and you have “something” which is like equity. (Which if inflation becomes high owning things is the only stable form of savings, since your $500 washer/drier was still $500 dollars, when they go up to $750 your used machine increases in value too and if the wash place raises it’s prices to $2 a load, even if your costs double too, you just save money faster with a payback period of 1.5 years.)
However, I don’t suggest you get rid of cable, Netflix or broadband internet since those provide fixed price entertainment. Seeing 5 movies (with someone else) a month costs me the same but only entertains me for 10 hours (and I have to spend $5 in gas to get to the theater), but since the average person has >200 free hours a month, what do you do the rest of the time? Yes, you will get chunky but if all your exercise was coming from walking to and from the car at the mall or theater, you were going to get chunky anyways. I want to give responsible advice, so take the saving and buy something that makes you forget you are exercising, like a soccer ball or a lawn games. While you might play a Navy Seal in a videogame and make him run 25 kilometers flat out, you are still sitting on you ass. Plus while real games never get old, video games do, so you have to buy new games and new systems to keep up. When was the last time you have to upgrade a ball because the field used Grass version 2.1 and your ball was only compatible with versions 1.9 or lower? America had a high tech Depression in the 1930’s with cars and radios, so I am proposing the future of high tech economic downturns. I don’t think it would be such a bad thing for people to realize that a sand box and a creative mind are excellent toys for children, but lets face it in the 1930’s the radio and the car were cheap entertainment for hard times and now it is DVDs and MP3s.
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