subject: 3 Of 9 Reasons For Current Real Estate Investing [print this page] If you own real estate or are thinking of purchasing real estate then you had better take care, because that this might be the most essential message you receive this year involving real estate and your financial future.
The last 5 years have seen explosive growth in the real estate market and as a result many people believe that real estate is the most secure investment you can make. Well, that is no more true. Rapidly going up real estate prices have caused the real estate market to be at price levels never before seen in history every time adjusted for inflation! The increasing number of people concerned about the real estate bubble signifies there are less available real estate clients. Fewer clients mean that prices are coming down.
The Federal Reserve Board Governor was concerned that the "softening" of the real estate market would damage the economy. In fact, he described the real estate market as frothy. All of these top financial experts agree that there is earlier a viable downturn in the market, so clearly there is a requirement to know the factors behind this transform.
3 of the highly rated 9 factors that the real estate bubble will burst include:
1. Interest rates are rising - foreclosures are up 72%!
2. First time homebuyers are priced out of the market - the real estate market is a pyramid and the base is crumbling
3. The psychology of the market has transformed so that now people are afraid of the bubble bursting - the mania through real estate is over!
The first factor that the real estate bubble is bursting is raising interest rates. Interest rates were at historic lows from June 2003 to June 2004. These low interest rates authorized people to pay for homes that were more overpriced then what they could mostly afford but at an identical monthly cost, principally creating "free money". However, the time of low interest rates has finished as interest rates have been rising and will stick with it to rise in addition. Interest rates must rise to fight inflation, partly because of high gasoline and food charges. Higher interest rates make owning a home more overpriced, thus driving existing home values down.
Higher interest rates are also impacting people who purchased adjustable mortgages. Adjustable mortgages have markedly low interest rates and low monthly payments for the first two to 3 years but afterwards the low interest rate disappears and the monthly mortgage payment jumps dramatically. Attributable to adjustable mortgage rate resets, home foreclosures for the 1st quarter of 2006 are up 72 %through the 1st quarter of 2005.
The foreclosure circumstance will only worsen as interest rates stick with it to rise and more adjustable mortgage payments are adjusted to a higher interest rate and higher mortgage payment. As stated, 25% of all respected mortgages are coming up for interest rate resets all through 2006 and 2007. That is $2 trillion of U.S. mortgage debt! When the payments boost, it will be quite a hit to the pocketbook. A study attained by one of the country's largest heading insurers concluded that 1.4 million households would face a payment jump of 50% or more once the introductory payment period is through.
The second factor that the real estate bubble is bursting is that new homebuyers are no longer able to pay for homes because of high prices and higher interest rates. The real estate market is a pyramid scheme and as long as the amount of buyers is growing everything is okay. As homes are purchased by first time home clients at the bottom of the pyramid, the new cash for that $100,000.00 home goes all the way up the pyramid to the seller and purchaser of a $1,000,000.00 home as people sell one home and pay for a more overpriced home.
This double-edged sword of high real estate prices and higher interest rates has priced many new clients out of the market, and now we are commencing to feel the effects on the overall real estate market. Sales are slowing and inventories of homes available for sale are rising rapidly. The newest report on the housing market showed new home sales fell ten.5% for February 2006. This is the biggest one-month drop in 9 years.
The third factor that the real estate bubble is bursting is that the psychology of the real estate market has transformed. For the last 5 years the real estate market has risen dramatically and if you purchased real estate you more than possible made cash. This positive return for so multiple investors fueled the market higher as more people saw this and decided to spend in real estate also before they 'missed out'.
The psychology of any bubble market, whether we are talking about the stock market or the real estate market is something know as 'herd mentality', where everyone goes after the herd. This herd mentality is at the heart of any bubble and it has happened many times in the past this includes during the US stock market bubble of the late 1990's, the Japanese real estate bubble of the 1980's, and even as far back as the US railroad bubble of the 1870's. The herd mentality had literally taken through the real estate market until lately.
The bubble goes on to rise as long as there is a "greater fool" to pay for at a higher price. As there are less and less "greater fools" available or willing to pay for homes, the mania disappears. When the hysteria passes, the excessive inventory that was built all through the boom time causes prices to plummet. This is true for all 3 of the historical bubbles said above and many other historical examples. Also of importance to note is that when all 3 of these historical bubbles burst the US was thrown into recession.
With the changing in mindset relevant to the real estate market, investors and speculators are realizing scared that they will be left holding real estate that will lose cash. As a result, not only are they purchasing less real estate, but also they are always offering their investment properties further. This is producing tremendous numbers of homes available for sale on the market at the same time that record new home construction floods the market. These two going up supply forces, the going up supply of existing homes for sale coupled with the going up supply of new homes for sale will in addition exacerbate the trouble and drive all real estate values down.
A recent survey showed that 7 out of 10 people think the real estate bubble will burst before April 2007. This transform in the market psychology from 'must own real estate at any cost' to a healthy concern that real estate is costly is causing the closing of the real estate market boom.
The aftershock of the bubble bursting will be big and it will impact the global economy tremendously. Americans will no longer be able to money out cash from their homes, and the entire economy will slow down dramatically thus prominent to recession.
In conclusion, the three factors the real estate bubble is bursting are higher interest rates, first time clients being priced out of the market; and the psychology about the real estate market is changing.
by: Calvin Tan
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