Chess players call it the endgame the final stage when the players' reduced forces have limited options. Smart players start thinking about the endgame well ahead of time.
There's an endgame in personal finances, too. It begins when you are no longer accumulating wealth but starting to dissipate it in retirement, for instance. Fail to plan and you could outlive your money, or condemn yourself to a less-than-desirable way of life when you're old.
With the case for planning put this simply, it seems obvious. But in real life, lots of people most, perhaps ignore it. That's why, during the Nasdaq bubble a few years ago, investors poured hundreds of billions of dollars into stocks that were soaring for no reason other than the fact that investors were pouring in hundreds of billions. We all know how that ended up.
And now you have to wonder whether people are doing the same with their homes.
Single-family homes are selling quickly, prices are soaring, and buyers who square off in bidding wars can end up paying thousands more than sellers have asked for. Buyers are waiving their right to standard safeguards like the home inspections that are meant to uncover costly flaws.
Why the frenzy? Low interest rates are the most obvious cause. When rates are low, buyers can qualify for bigger loans, so they can afford to bid higher. Though rates have been low for two years, many people may be rushing to buy now for fear rates will rise as the economic recovery progresses.
But they have another reason to rush fear that rising property prices will put their dream homes out of reach, even if interest rates stay low. This overeagerness to buy is a classic sign of a bubble.
Finally, there is the "flight to quality." Discouraged over losses in the stock market, people may be seeking safety and bigger returns by "investing" in their homes.
This, of course, turns standard investing strategy on its head: People who dump stocks to buy houses are selling low to buy high. Someday they may regret it.
Some of the real estate brokers quoted in a recent Philadelphia Inquirer article sounded like the stockbrokers and Internet analysts cheering on the tech-stock bubble of 1999. In today's market, you've got to move fast to get the house you want, one argued.
Especially alarming was the broker who described shopping around for "aggressive" home appraisers who would make it possible for buyers to get loans on homes selling at sky-high prices. If this becomes widespread, the responsible appraisers will have to cave in and do the same, or go out of business.
Thus, we'll lose one of the important checks and balances in the system the appraisers who are supposed to make sure the property provides sufficient collateral for the loan. Then, if the economy sours, it won't be just the foolish homebuyers who get in trouble. The lenders won't be able to cover the cost of mortgage defaults by foreclosing. Who knows what ripple effects that could send through the economy? It wouldn't be good.
Well, isn't a house a good investment?
I'm all in favor of homeownership. The interest-rate deduction on the federal tax return is a great deal. Owning is a good way to build equity and to put a cap on the principal and interest portion of your housing cost.
But as investments, homes have some serious shortcomings, too, and you have to plan for the endgame.
If you buy a home that grows in value as you hope it will, how will you get your profit out? Will you sell and move to a cheaper property? Will you live in the home long enough for rising values to cover the broker's commission and other costs you are likely to incur when you sell?
If you stay, will you get hold of your investment gains by continually taking out new loans against the growing equity, saddling yourself with ever-larger debts as you grow older?
What will happen if real estate prices fall? Will you have enough money from other sources to cover any shortfall if you have to sell and get less than you owe on the loan?
And if you lose your job, how long could you keep up your mortgage payments?
A house is mainly a home, not an investment. If low interest rates make it possible for you to get the home you need, terrific! But if you want to invest, look for something that's selling at an unusually low price. That doesn't describe residential real estate today. Unless you assume there's always someone willing to pay more, which is what investors thought about tech stocks in 1999.