MANAGING YOUR MONEY : OVERVIEW : The Cold Winds of Reality
Oh, what a time we had in the 1980s! In Southern California, the value of our homes more than doubled during the decade, and that added $150 billion to our collective wealth. Our personal income rose more than 60%. We increased the number of cars we own by 25%, and we spent almost 90% more at our retail stores.
Talk about a party. No wonder the hangover we’re suffering in 1990 seems so dreadful.
Suddenly, everybody has become sober and more cautious--especially here in the Southland, where the feeling of economic well-being is inextricably linked to the value of a home. If prices are rising rapidly, as they were for most of the 1980s, people make certain assumptions about their future and make other decisions about purchases and careers accordingly. But if prices are not rising, our sense of economic well-being starts to falter.
These days, every neighborhood seems to have several houses for sale. Few are selling, and prices have been falling steadily for the past year. As a result, we’re all feeling less rich, less secure and less carefree.
And that feeling, more than any other, can play a large part in turning our current slowdown into a deep recession.
The fundamental underpinning of the Southern California economy is the single-family home and its pricing, according to a report issued earlier this year by the Wall Street investment firm of Salomon Bros. Because of the huge amount of new wealth generated by the home price run-up of the 1980s, people were able to leverage themselves and increase their standard of living by means of mortgages and home equity loans.
“Therefore,” the Salomon Bros. report prophetically concluded, “any hiccup in house prices could reduce economic activity and affect a broad base of people.”
What this means, in its simplest terms, is that people can no longer count on their homes to be their best investment. The expectation that a home in California is the safest, surest way to make money is dwindling. So now what should you do?
The best advice may be simply not to panic.
In California, this may sound like heresy, but a house is meant to be lived in, not traded like a share of stock. Its purpose is to shelter you from the elements, not make you a millionaire. People in many other parts of the nation have no expectation of selling their homes for huge profits. Unfortunately, we do.
The realization that homes may no longer be such a great investment, according to some experts, may actually help Southern Californians seek new and better places to invest their money. And that process may refocus our attention on solid investment principles, the type taught in beginning economics classes: A share of stock is only as valuable as the company that issues it, for example, and the bigger the potential profit, the higher the risk. And so on.
For some people, particularly in go-go Southern California, the rules of Econ 101 were suspended in the 1980s. We heard about the unending flood of money from abroad, driving up our real estate and commercial markets and making every investment here a sure thing. We heard that growth made the Golden State recession-proof.
Forget it.
For at least the next few years, California will be a very slow growing place, and many of its biggest industries--particularly aerospace and construction--will be cutting back. That means a lot of well-paying jobs may disappear. Recessions in other world economies, notably Japan, are likely to slow the influx of foreign investment. Unlike other housing booms in California, that of the 1980s was fueled in large measure by foreign money; and if it disappears, the current slowdown could be much more severe than earlier busts.
Even if we avoid a recession according to the classic definition, we won’t avoid considerable economic pain and slowdown.
As a result of all this, our personal investment strategies may start to look much more like those of our parents and grandparents. Saving a healthy portion of our income may be the safest, surest way to build wealth. Slow, unspectacular and boring, perhaps, but solid and dependable. It is an investment that depends on no outside forces, unlike home prices.
Investing a portion of those savings in a variety of things--some stocks, some mutual funds, some real estate, some bonds--may protect us from losing big if any one thing goes sour. Again, not very exciting; the adrenaline isn’t pumping.
This dose of reality may be hard for some to accept, particularly those who rode the crest of California’s economic boom in the 1980s.
But those who accept the new realities and invest according to the tried-and-true rules of Econ 101 are those most likely to do well as we sober up in the 1990s.
