money. Democracy, capitalism, and the American dream have led people to
seek fortunes. The problem is that many folks who rushed into a venture or
an investment saw these dreams diminish as they got in either too late or
too early or were just poorly informed. Looking back in recent history, manias
such as the “tech wreck” and the stock market bubble financially ruined
many people. And there were the innocent victims who invested in
Enron, AT&T, and other such companies. I am not talking about speculators;
I am referring to employees of those companies who had their retirement
savings invested with their employers. Lately, we see weakness and a
potential for a bubble to burst in the real estate market. Perhaps you are invested
in a second home or know someone who made a killing buying and
selling fixer-uppers. The term “flippers” was popular as FSBO (for sale by
owner) signs were planted in the front lawn of houses across the United
States as eager investors were enticed to flip the property and make a fast
buck. If you were in the game early on, you did well. If you got in the game
late and are holding onto excess inventory, then you are at risk.
In late June 2006, many investors were left holding the bag on excess
inventory—they bought a housing unit (condo, town home, or home) to
turn around and sell for a profit but, due to such market conditions as an
excess supply of homes for sale, cannot sell the property. Most of their
cash or past profits may be tied up in the investment. Even worse, they may
be overextended in credit from their bank. These are the folks who will be
exposed to major financial disaster. To make matters worse, the Federal
Reserve (the Fed) raised interest rates once more, for a record-breaking 17consecutive hikes. That brought the Fed Funds interest rate to 5.25 percent.
The prime lending rate shot up to 8.25 percent. That put the fixed rate for a
30-year mortgage up to 6.62 percent (actual mortgage rates depend on your
credit score, down payment, etc.). What this did in effect was to bring on
higher borrowing costs, which slowed the housing market even more.
As of October 2006, both new and existing home sales have continued
to slow. Higher mortgage rates had been expected to slow the housing market,
and they finally started showing their effects. Just to show you, mortgage
rates went up roughly 125 basis points since the same period starting
from 2005. So when the reports came in from June 2006, new home sales
edged down 3.0 percent to an annual rate of 1.131 million. New home sales
were down 11.1 percent on a year-over-year basis. The graph in Figure 1.1
shows the rise in mortgage rates and the decline in new home sales.
It did not stop there either; existing home sales slowed with supplies
rising. Existing home sales edged down 1.3 percent in June 2005. Existing
home sales at that time were down 8.9 percent on a year-over-year basis.
Supply became even more of an issue for existing homes than for new
homes as inventory of unsold existing homes rose in June 2006 to 6.8
months from 6.4 in May 2006. That set a supply figure at a nine-year high.
Figure 1.2 shows the same trend: As rates moved up, sales declined.This slowdown has many investors looking to maintain a means to generate
an income, which is what is attracting so many people into trading the
forex market. Some of the benefits of forex trading are that there is no traveling
involved, you trade from the comfort of your home or office through
the Internet, and you have virtually 24-hour access to the market. Yes, there
are risks to trading; but as we have seen in the past, most investments come
with risk. You just need to be properly informed and educated, and that is
what I want you to achieve through reading and studying the material presented
in this book.
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