What happened in the news yesterday? We haven’t had time to look.

So, we write only to pass along conversation.

"The trouble with all salesmen," began a conversation yesterday, "is that they begin to believe their own claptrap. That’s true of stock promoters. It’s true of politicians. It’s true of real estate investors. I don’t know; it might even be true of gigolos.

"Right now, all over America, people are becoming real estate brokers. There are thousands of new ones every day, because they think it is the royal road to riches. They figure they will get an inside track to making a lot of money. They figure they’ll get paid for doing market research. I mean, they’ll get to go around to look at houses that are for sale, and they’ll get paid to do it. All they have to do is sell a house now and then and they can earn a decent living from commissions, but the real money is when they find a gem of a house at a discount…then they figure they will pounce on it.

"What’s happened is that they’ve bought into the real estate industry’s spiel. They think it always goes up. And since it’s going up all the time, they want to be in on it.

"What you don’t see in the real estate numbers is a lot of buying and selling within the real estate profession. A guy gets a license to sell property. The next thing you know, he’s not selling a thing…he’s buying. He is fundamentally a believer, but his buying is not ‘normal.’ A few years ago, he was probably buying tech stocks. And before that, who knows what it was, but this is not a guy who will hold onto his house in a slack market. He’ll sell…either because he has to, or because he loses interest. There’s a lot of that kind of very petty speculation going on. These people will leave real estate when the going gets tough and move on to something else."

We have been thinking about property — perhaps because we are surrounded by it. When prices rise more than 20% per year, as they have in the greater Baltimore-Washington area, it draws attention. We went down to Baltimore’s Fells Point area last night for dinner. We felt as though we were in a new city. It was as if we had never been there before: New restaurants, new condominiums, and new parking garages.(We recalled the days when you could get drunk and drive right down the main street directly into the water. Alas, those days are gone.)

And so, our own thoughts and opinions are bent towards the real estate market, as if by some powerful magnet. Pretty soon, we have a warped view of the world…in which "you can’t lose money in real estate."

Yet, we sit this morning in a building whose real value — even today — is probably less than it was 75 years ago. As near as we can determine, the value of central city property in Baltimore hit its high in the 1920s, or maybe before. Then, the city began a decline from which it has never fully recovered. By the 1970s or 1980s, it probably hit bottom with luxury apartments in the center of town selling for as little as $30,000. Since then, prices have generally gone up, but even as late as the early 1990s, when we bought our office building, prices were depressed. Our place is an elegant mansion of 16,000 square feet. It wasn’t in bad shape when we bought it, but the price reflected a long period of malaise and discouragement with property. We paid only $500,000 — and worried about it. Now, the building is probably worth more than a million. We have no sure figures, but we recall a calculation that showed it was worth more than that, in real terms, a century ago.

Out on the plains the story is a little different. As reported in this space a few days ago, prices for Kansas farmland reached a peak in the 1880s. They have never recovered.

Does real estate always go up over the long term? We don’t know. If so, you may have to live as long as Methuselah to find out.

*** We heard some interesting news on the way in to the office today. NPR reports that, thanks to a new accounting system that is better able to track the private sector, China has discovered $300 billion in its economy.

Many expect revised economic data being released next week to show the country’s economy to be about 20 percent larger than thought.

We’ll keep you updated…

*** "I tell you," began a Florida real estate developer, who was visiting us in Baltimore, "the problem in real estate is going to be worse than people imagine. I’m involved in dozens of different projects. What we’re seeing is a lot more speculation. Normally, we count on selling about 15% of our new units to investors. But now, we’re selling 60% to 70%. As builders and developers that poses no problem…at least not for right now. But everywhere I look in the real estate area in South Florida…I see fuses, and they’re lit.

"First, you have all this extra production being bought up by speculators. It’s a lit fuse, and it’s going to blow up because in a few months these units are going to be completed, and the speculators aren’t going to move in. They are hoping to flip them, but who are they going to flip them to? It’s a fuse, and I figure it’s only got a couple of more months left on it.

"Second, there are all these people who have bought more house than they could afford. A few years ago they were living in a $200,000 house, but they figure they want in on the boom…so they buy a $500,000. Why do they do that? Because that way they get more leverage, while they get to live in a better house. If the house goes up 20% in a year — which is what they’ve been doing — the guy makes $100,000 per year on his house, which is probably more than he makes from his job. Who can say no to that? But it’s a lit fuse, because it costs a whole lot more to maintain a $500,000 house than it does to maintain a house that only costs $200,000. You have to pay more insurance, higher taxes. If it’s in a development, you have to pay a fee to the community, or a condo fee. And, of course, you have to heat and cool the place, not to mention regular maintenance. It all adds up, and for many people, those bills are just coming in. "It’s like other things, at first the whole thing is a dream. You’re living in a bigger, nicer house. You’re feeling very successful. So, you gradually expand your lifestyle to suit the bigger house. You can’t help it. Gradually, you get in trouble not only from the direct costs of having a larger house, but the indirect costs, too. I mean if you’re living in a fancy house in a fancy community, you have to have a fancy car parked in front of it. That’s just the way people are, but it’s a lit fuse, and it’s going to blow up on a lot of people.

"And third, the lenders are getting squeezed by both the regulators and by higher interest rates. They’ve got to pass the squeeze along to the borrowers. They don’t have any choice. So, gradually, a lot of people with interest-only mortgages, for example, are going to find that they’ve got to start paying principle as well as interest, and they’re going to have to make higher payments. New buyers are going to find it’s not so easy to finance 100% of a new house. People are going to get hurt because they aren’t going to be able to keep up with the expenses and the higher financing costs. They’re not going to be able to find a new buyer to bail them out. What I see is another lit fuse there. It’s burning now, but it’s got to blow up sooner or later."

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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