Three Good Reasons Why Real Estate Bubble is Bursting
When you have real property or are planning of purchasing property then you better pay attention, because this may be the most significant message you get this year about real estate and your financial future.
The previous 5 years have seen intense growth in the market and because of this many individuals assume that real estate is the most trusted investment you can make. Well, that is no longer true. Rapidly increasing real estate prices have caused the market to be at price levels never before seen in history if adjusted for inflation! The growing quantity of people interested in the real estate bubble means you can find less available real estate buyers. Fewer buyers imply that prices are coming down.
On May 4, 2006, Federal Reserve Board Governor Susan Blies mentioned that “Housing offers really like peaked”. This follows on the heels of the new Fed Chairman Ben Bernanke saying that he was concerned that this “softening” in the market would damage the economy. And ex – Fed Chairman Alan Greenspan earlier described the real estate market as frothy. Many of these top fiscal experts agree that there is already a workable recession in the market, thus clearly there is a need to understand the reasons for this change.
3 from the top 9 reasons that the real property bubble will burst incorporate:
1. Mortgage rates are growing – house foreclosures are up 72%!
2. First time buyers are priced out from the market: the real estate market is a pyramid and the base is crumbling
3. The psychology in the market offers changed so that now people are afraid of the bubble bursting – the mania over property is over!
The first reason that the real property bubble is definitely bursting is rising home interest rates. Under Alan Greenspan, home interest rates were from historic lows from June 2003 to June 2004. These low mortgage rates permitted people to obtain houses that were more costly then what they can normally pay for but in the same month-to-month cost, essentially creating “free money”. On the other hand, the time of low home interest rates has ended as home interest rates have been growing and can continue to rise further more. Interest rates must increase to combat inflation, partly thanks to high fuel and food costs. Higher mortgage rates make owning a property more costly, therefore driving existing house values down.
Higher mortgage rates are also affecting folks who bought variable mortgages (ARMs). Adjustable mortgage loans have very low interest rates and low monthly bills for the 1st two to three years but afterwards the low interest rate vanishes as well as the monthly home loan payment jumps dramatically. From adjustable mortgage loan rate resets, home foreclosures to the 1st Quarter of 2006 are up 72% on the 1st Quarter of 2005.
The foreclosures situation can only get worse as home interest rates continue to rise and much more adjustable mortgage payments are adjusted to a higher interest and higher mortgage payment. Moody’s stated that 25% off outstanding home loans are coming up for interest rate resets during 2006 and 2007. That is $2 trillion of U. S. mortgage debt! When the payments increase, it shall be quite the hit to the pocketbook. A study done by one of the country’s greatest title insurance companies concluded that 1. 4 trillion households will certainly face the payment jump of 50% or higher once the introductory monthly payment period has ended.
The next reason that the real property bubble is actually bursting is the fact new homebuyers are no longer able to get homes because of high prices and higher home interest rates. The real estate market is essentially a pyramid structure and if the number of buyers is increasing every thing is very good. As houses are bought by first time home buyers at the bottom of the pyramid, the new money for the $100, 000. 00 house goes all the way up the pyramid towards the seller and buyer of the $1, 000, 000. 00 residence as individuals sell you home and purchase a more costly house. This double-edged blade of high real-estate prices and higher home interest rates has cost many new buyers out from the market, and now we are starting to feel the consequences on the real estate market. Sales are slowing and also inventories of homes for sale are rising swiftly. The most recent report on the housing market showed new home sales fell 12. 5% for February 2006. The largest one-month drop in 9 years.
The third reason that the real property bubble is bursting is that the psychology on the real estate market has changed. For the past five years the market has grown drastically if you purchased real estate you most probably made money. This positive return for countless investors fueled the market higher because more folks saw this and decided to also spend money on real real estate just before they will ‘missed out’.
The psychology of any bubble market, whether we’re talking concerning the stock market or the market is often known as ‘herd mentality’, in which everyone uses the herd. This herd mentality is in the centre of any bubble and it has transpired quite a few times in the past including in the US currency markets bubble in the late nineties, japan real property bubble in the 80’s, and perhaps as far back as the US train bubble in the 1870’s. The herd mentality had completely taken in the market until recently.
The bubble continues to rise as long as there is a “greater fool” to get at a better price. As there are less and less “greater fools” on the market or willing to purchase properties, the mania disappears. When the hysteria goes by, the extreme inventory that was built during the boom time causes prices to drop. This really is true for all three of the historical bubbles stated previously and several historical examples. Also of importance to note is that when all three of these historical bubbles burst Us States was placed into economic depression.
With this changing in mindset regarding the market, investors and speculators get scared that they will be left holding real estate property that will probably lose money. As a result, not just are they purchasing less real estate, however they are concurrently offering their investment properties at the same time. This is producing enormous numbers of homes for sale on the market simultaneously that report new property construction floods the marketplace. These 2 increasing offer forces, the increasing supply of current homes for sale coupled with the growing supply of brand new homes for sale will further more worsen the condition and push all property values down.
A latest survey confirmed that 7 out of ten individuals think the best estate bubble will burst before April 2007. This change in the market psychology from ‘must own real-estate at any cost’ into a healthy worry that real estate is expensive is causing the end of the market boom.
The aftershock on the bubble bursting is going to be enormous and it will have an effect on the worldwide economy greatly. Billionaire buyer George Soros has said that in 2007 Us States will be in economic downturn and I believe him. I do believe we shall be in the economic downturn because as the real property bubble bursts, jobs shall be lost, Us citizens will no longer be capable to cash out money from their homes, as well as the entire financial state will slow down significantly therefore resulting in recession.
In conclusion, the three reasons the best estate bubble is actually bursting are higher mortgage rates; first-time buyers being priced from the market; and the psychology about the market is changing. The recently published e-book “How To Prosper From the Changing Market. Protect Yourself From the Bubble Today! ” talks about these things in far more detail.
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