Why's that? Because today's investors have notoriously short attention spans.

Case in point: Many look at the current real estate market certain it "has never been like this" and "will just keep booming indefinitely." Unfortunately, it's just this kind of "historical shortsightedness" that's led to the downfall of too many investors.

Not to say that history always repeats itself precisely. Each age has its own brew of conditions, excesses and personalities. And that puts a unique stamp on current events. For the most part, though, the past does tend to repeat. And that's because man is a cyclical creature who can't help making the same mistakes.

Especially when it comes to money.

Where am I going with this? Well…to the housing bubble.

Interest-only mortgages? ARMS? Stratospheric valuations?

These are strictly 2005 phenomena, right?

Not exactly. Although Interest-only mortgages sound so 21st Century sophisticated, they didn't debut anywhere near 2005. The truth is, they actually showed up before the most pivotal economic event of the last hundred years.

That's right, the Great Depression. A recent article in the Wall Street Journal had this to say: "Interest-only mortgages were the standard mortgage in the 1920s, but they disappeared during the Great Depression, and for good reason ... the drop in real-estate values during the Depression pushed a large proportion of interest-only loans into foreclosure. Lenders switched entirely to fully amortizing loans, and that has been the standard mortgage loan since."

Like stocks, real estate was a speculative favorite of the Roaring Twenties' investor. To control as much real estate as was humanly possible-to leverage their money to the hilt-these "can't lose" investors needed a mortgage device to accommodate their aggressiveness. And interest-only mortgages filled the bill.

IO loans provided easy entry into a house: You simply paid the mortgage interest, which freed the rest of your money for other investments. That part of the loan usually lasted five years or so, at which time you'd either refinance or stay with the original terms of the agreement. Those terms called for a reversion to a fully amortizing loan, except now on a somewhat accelerated basis.

In other words, in the initial years of an IO loan, your money only went toward controlling the property. Not owning it.

So what happened to these and other mortgages after the first Black Monday hit on October 28th, 1929? Three things:

• First, just to survive, people withdrew their money from the banks en masse.
• That meant banks severely curtailed their lending, and that included refusing to refinance any mortgages-especially interest-only-that came due. And that was in addition to calling loans in early.
• Without the possibility of refinance-and with all that lost income from all those lost jobs-Americans faced foreclosure, also en masse.

But that was yesterday, right? It has no actual bearing on today. None whatsoever.

Since real estate remains the sole surviving mania of the wild 90s, it stays the focus of investors. And that's led banks, like Wells Fargo, to continue focusing on real estate investors.

Back in 2001, Wells Fargo was the first to resurrect the interest-only mortgage. To hear the bank tell it, it wasn't because people were desperate. "Actually, it's almost the converse of that. Many borrowers want to take their additional cash flow and invest it one way or another," observed Brad Blackwell, the national sales manager for Wells Fargo Home Mortgage.

Interestingly enough, borrowers are virtually waiting in line for these IO and adjustable rate mortgages. In fact, these mortgages made up 63 percent of all loans originating in the second half of 2004.

Echoes of 1929?

Maybe at the end of a prolonged cycle of prosperity, common sense sneaks out the side door and financial insanity takes up permanent residence.

Financial educator, Ruth Hayden calls this insanity "Yuppie Money."

"Yuppie money is, 'How far can we leverage out? How far can we cash flow? How much stuff can we have? You know, we can get a much bigger car with a lease, we can get a much bigger house if we're not paying off principal, we can have much nicer furniture, we can take much nicer trips.' It's all about the stuff."

Maybe there were Yuppies in the Roaring Twenties, too. Maybe they, too, thought nothing would ever change their world, and that they could just invest their way to some sort of materialistic Nirvana.

But we all know how that turned out. And it seems obvious that today's "Yuppies" haven't learned the critical difference between merely "having" and "owning" from their ancestors.

"When we hit the bear market after the bull market, a lot of my Yuppie-moneyed people collapsed," Hayden continued. "They had maxed out on margin loans, house equity, credit cards and lines of credit, and now for the first time had to look at their lifestyles."

But that's still not the woodshed beating Americans got in October of 1929. Unfortunately, that may yet be ahead of us.

Here are some 2005 similarities to the real estate picture in the Roaring Twenties:

• People are overbuying and overextending. In the last three years, the monthly mortgage payments for a median-value home jumped from $804 to $1,016. That's up over 26%. Yet incomes grew only 10.5%. A similar "throw caution to the wind" overextension is what got so many people in trouble after the 1929 Crash.



• According to an article on Howestreet.com, "The Housing Affordability Index shows the percentage of American households that can afford a median home. A year ago, that index stood at 57. Now it's 50 and falling. This means that only one out of two families in the country can now afford an average dwelling. In superheated markets, the situation is far worse: A mere 17% of California families can afford that same house."
  
  This is what's accounting for the popularity of interest-only and adjustable-rate mortgages, where monthly costs are temporarily lower. "People see the low monthly payment, and that is all they care about," observed one mortgage professional. This same shortsightedness is what led to so many foreclosures in the 1930s. Speaking of that…



• The housing boom has "a dark side-a sharp rise in foreclosures that is destroying the single greatest generator of personal wealth for most Americans. Foreclosure rates rose in 47 states in March, according to Foreclosure.com, an online foreclosure listing service. The rates in Florida, Texas and Colorado are more than twice the national average. Even in New York City and Boston, where real estate markets are white-hot, foreclosures are rising in working-class neighborhoods," wrote Michael Powell of the Washington Post,
  
  "Should the nation's housing bubble deflate, as many economists and federal officials expect, the foreclosures could prefigure a national crisis," he continues, "Americans now shoulder record levels of housing debt-more than 8 percent of homeowners spend at least half of their income on their mortgage.""Should the nation's housing bubble deflate, as many economists and federal officials expect, the foreclosures could prefigure a national crisis," he continues, "Americans now shoulder record levels of housing debt-more than 8 percent of homeowners spend at least half of their income on their mortgage."

Needless to say, foreclosures were so prevalent in the 1930s that the word itself was hated and avoided. Some states even passed "foreclosure moratoriums" to put the breaks on this mounting disaster.

That Howestreet.com article also told of the sale of "$1 million trailers in a mobile home park in Malibu." And that was just for the trailers, not the land they sat on.

No greater evidence exists that the housing boom is about to end! Even so, when housing does go south, will anything be around to hedge it?

Maybe, in the larger picture, the question ought to be, "What will give battered investors confidence in these scary times?" And the answer, historically, has always been gold.

Maybe we were born knowing we should turn to gold when things turned bad. Maybe it's in our genes, because that's what happened in the 30s. Just four years into the Great Depression, gold had risen nearly 70%.

Of course, Washington had confiscated the precious metal in 1933. Maybe it instinctively knew enough to turn to gold, too.

But man truly is a cyclical creature. With some gold in our portfolios, though, our cycles can turn to boom instead of bust.

Kevin DeMeritt
www.goldcentral.com
September 15, 2005