If you have property or are thinking of purchasing real estate then you better pay attention, because this could be the most important message you receive this year regarding property and your financial future.
The past five years have seen explosive growth in the real estate market and consequently a lot of men and women believe that property is the safest investment you can make. Well, that’s no longer correct. The growing number of individuals concerned about the real estate bubble means that there are less available property buyers. Fewer buyers mean that prices are coming down.
This follows on the heels of the new Fed Chairman Ben Bernanke saying that he had been concerned the”softening” of the housing market would hurt the economy. And former Fed Chairman Alan Greenspan previously described the real estate marketplace as frothy. All these top financial experts concur that there is already a viable downturn on the current market, so clearly there’s a need to know the reasons behind this shift.
3 of the top 9 reasons which the real estate bubble will probably burst include:
- Interest rates are climbing – foreclosures are up 72%!
- The first time homebuyers are priced from the market – that the real estate market is a pyramid and the foundation is crumbling
- The psychology of this marketplace has shifted so that now people are afraid of this bubble bursting – the mania over real estate is over!
The Meridian id real estate blog primary reason that the real estate bubble is bursting is rising interest rates. Under Alan Greenspan, interest rates were at historical lows from June 2003 to June 2004.
These low interest rates enabled individuals to buy homes which were more costly then what they can afford but at the identical monthly price, essentially creating”free money”. On the other hand, the time of low interest rates has stopped as interest rates have been rising and will continue to grow further. Rates of interest must rise to combat inflation, partially due to high gas and food expenses. Higher interest rates make owning a house more costly, thus driving present home values down.
Higher interest rates are also impacting those who bought adjustable mortgages (ARMs). Adjustable mortgages have very low rates of interest and low monthly payments to the first two to three decades but after the low interest rate fades and the monthly mortgage payment jumps dramatically.
The foreclosure situation is only going to worsen as interest rates continue to grow and more flexible mortgage payments are adjusted to a higher rate of interest and higher mortgage payment. That’s $2 trillion of U.S. mortgage debt! When the payments grow, it’ll be a significant hit to the pocketbook. A research done by one of the country’s largest title insurers concluded that 1.4 million households will confront a payment jump of 50% or more after the introductory payment period is finished.
The next reason that the real estate bubble is bursting is that new homebuyers are no longer able to get homes as a result of high rates and higher rates of interest. The housing market is basically a pyramid scheme as long as the amount of buyers is growing everything is fine. As homes are purchased by first time home buyers in the base of the pyramid, the new cash for this $100,000.00 house goes all the way up the pyramid to the seller and buyer of a $1,000,000.00 home as people sell one house and buy a more expensive home.
This double-edged blade of high real estate prices and high interest rates has priced many new buyers out of the market, and now we’re beginning to feel the effects on the general housing industry. Sales are slowing and inventories of homes offered for sale are increasing rapidly. This is the largest one-month fall in nine years.
The third reason that the actual estate bubble is bursting is that the psychology of the real estate market has changed. For the last five years the property market has improved dramatically and if you bought property you likely made money.
The psychology of almost any bubble marketplace, whether we are talking about the stock market or the housing market is called’herd mentality’, where everyone follows the herd. The herd mentality had completely taken over the real estate market until recently.
The bubble continues to grow as long as there’s a”greater fool” to purchase at a higher price. After the hysteria passes, the surplus stock that was built during the boom time causes costs to plummet. That is true for all three of those historic bubbles mentioned above and a number of other historic examples. Also of significance to notice is that if all three of those historical bubbles burst the US was thrown into collapse.
Together with the changing in mindset linked to the real estate market, investors and speculators are getting scared that they will be left holding real estate that will lose money. As a result, not just are they buying less property, but they are simultaneously selling their investment properties as well. This is producing huge quantities of homes available for sale in the marketplace at precisely the same time that listing new home building flooding the marketplace. These two rising furnish forces, the rising supply of current homes for sale coupled with the rising supply of new houses available will exacerbate the problem and drive all property values down.
This change in the market psychology from’have to own real estate in any cost’ to a healthy concern that real estate is overpriced is inducing the conclusion of the actual estate market boom.
The aftershock of the bubble bursting will be huge and it will affect the global market tremendously. Billionaire investor George Soros has said that in 2007 the US will probably be in recession and that I concur with him. I believe we will maintain a recession since the actual estate bubble pops, 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 drastically consequently resulting in recession.