If you own real estate or are thinking of buying real estate then you better listen, because this really is the most important thing you get this year regarding property and your future.
The past five years have seen explosive growth in the housing market and consequently many people believe that property is the safest investment you can make. Well, that’s no longer correct. The rising number of individuals concerned about the real estate bubble means there are less available Four Seasons residences Surfside real estate buyers. Fewer buyers mean that prices are coming down.
This follows on the heels of this new Fed Chairman Ben Bernanke saying that he had been worried that the”softening” of the real estate market would hurt the economy. And former Fed Chairman Alan Greenspan previously described the property marketplace as frothy. All of these leading financial experts agree that there’s already a viable downturn on the market, so clearly there’s a need to be aware of the motives behind this shift.
3 of the top 9 reasons that the real estate bubble will probably burst include:
- 1. Interest rates are climbing – foreclosures are up 72%!
- 2. The first time homebuyers are priced from the market – that the Housing Market is a pyramid and the foundation is crumbling
- 3. The psychology of the market has changed so that today people are terrified of this bubble bursting – the mania within real estate is over!
The first reason that the actual estate bubble is exploding is increasing interest prices. Under Alan Greenspan, interest rates were at historic lows from June 2003 to June 2004. These low interest rates allowed people to buy homes that were more expensive then what they can afford but in the identical monthly cost, basically making”free money”. However, the time of low interest rates has ended as interest rates are rising and will continue to grow further. Interest rates must rise to combat inflation, partially due to high gasoline and food costs. Higher interest rates make owning a home more costly, thus driving present home values down.
Higher interest rates are also impacting those who purchased adjustable mortgages (ARMs). Flexible mortgages have very low interest rates and reduced monthly payments for the first two to three decades but after the low interest rate disappears and the monthly mortgage payment jumps dramatically.
The foreclosure situation is only going to worsen as interest rates continue to rise and more adjustable mortgage payments are adjusted to a higher rate of interest and higher mortgage payment. When the payments grow, it will be a significant hit to the pocketbook. A research done by one of the country’s largest title insurers concluded that 1.4 million families will face a payment jump of 50% or more once the introductory payment period is over.
The next reason that the real estate bubble is bursting is that new homebuyers are not able to buy houses due to high prices and higher rates of interest. The real estate market is essentially a pyramid scheme as long as the number of buyers is growing what’s fine. As homes are purchased by first time home buyers at the base of the pyramid, the new money for that $100,000.00 house goes all of the way up the pyramid into the seller and buyer of a $1,000,000.00 home as individuals sell one house and buy a more expensive house. This double-edged sword of high property costs and higher interest rates has priced many new buyers out of the market, and now we are starting to feel the ramifications on the overall housing industry. Sales are slowing and inventories of homes offered for sale are rising rapidly. The most recent report on the housing market showed new home sales fell 10.5percent for February 2006. This is the largest one-month drop in nine decades.
The third reason that the real estate bubble is bursting is the psychology of the real estate market has changed. For the last five years the real estate market has risen dramatically and if you purchased real estate you more than likely made cash. This favorable yield for so many investors fueled the market higher as more people saw this and decided to also invest in property before they’missed out’.
The psychology of almost any bubble market, whether we’re talking about the stock exchange or the housing market is known as’herd mentality’, where everyone follows the herd. This herd mentality is at the heart of any bubble and it has happened numerous times in the past including throughout the US stock market bubble of the late 1990’s, the Japanese property bubble of the 1980’s, and even as far back as the US railroad bubble of the 1870’s. The herd mentality had taken over the real estate market until recently.
The bubble continues to grow as long as there’s a”greater fool” to buy at a higher price. After the hysteria moves, the surplus stock that was built during the boom period causes prices to plummet. That is true for all three of those historical bubbles mentioned above and many other historic examples. Also of importance to notice is that if all three of those historic bubbles burst the US was thrown into recession.
With the changing in mindset related to the real estate market, investors and speculators are getting scared that they will be left holding property that will eliminate money. Because of this, not just are they buying less property, but they are concurrently selling their investment properties as well. This is producing huge quantities of homes offered for sale in the marketplace at the exact same time that listing new house building flooding the marketplace. These two rising supply forces, the increasing supply of current homes for sale combined with the rising supply of new houses for sale will exacerbate the issue and drive all real estate values down.
This shift in the industry psychology from’must own real estate at any cost’ into a healthy concern that real estate is overpriced is causing the end of the housing market boom.
The aftershock of the bubble bursting will be enormous and it will influence the global economy tremendously. Billionaire investor George Soros has said that in 2007 that the US will probably be in recession and I agree with him. I think we’ll be in a recession because as the real estate bubble bursts, jobs will be lost, Americans will no longer have the ability to cash out money from their homes, and the entire economy will slow down dramatically thus resulting in recession.