3 of the top 9 reasons that the real estate bubble is breaking
If you own real estate or are thinking of purchasing real estate then you much better pay attention, because this could be the most important message you receive this year relating to real estate and your financial future.
The last five years have seen explosive development in the real estate market and as an outcome lots of people think that real estate is the best financial investment you can make. Well, that is no longer real. Quickly increasing real estate prices have triggered the real estate market to be at price levels never ever before seen in history when adjusted for inflation! The growing number of people worried about the real estate bubble implies there are less offered real estate buyers. Less purchasers suggest that costs are coming down.
On May 4, 2006, Federal Reserve Board Guv Susan Blies stated that "Housing has truly sort of peaked". This follows on the heels of the brand-new Fed Chairman Ben Bernanke stating that he was worried that the "softening" of the real estate market would harm the economy. And former Fed Chairman Alan Greenspan previously described the real estate market as frothy. All of these leading financial experts concur that there is currently a practical downturn in the market, so plainly there is a requirement to know the reasons behind this modification.
3 of the top 9 factors that the real estate bubble will rupture consist of:
1. Interest rates are rising - foreclosures are up 72%!
2. Very first time homebuyers are evaluated of the market - the real estate market is a pyramid and the base is crumbling
3. The psychology of the marketplace has actually changed so that now people https://integrated-realty.blogspot.com/ are afraid of the bubble breaking - the mania over real estate is over!
The first reason that the real estate bubble is rupturing is rising interest rates. Under Alan Greenspan, interest rates were at historical lows from June 2003 to June 2004. These low interest rates permitted people to buy houses that were more pricey then what they might normally manage however at the same monthly cost, basically developing "totally free loan". Nevertheless, the time of low rate of interest has ended as rate of interest have been increasing and will continue to increase further. Rate of interest must increase to combat inflation, partially due to high fuel and food expenses. Greater rate of interest make owning a home more expensive, hence driving existing home values down.
Greater interest rates are also impacting individuals who bought adjustable home mortgages (ARMs). Adjustable mortgages have really low interest rates and low month-to-month payments for the very first two to three years however afterwards the low rate of interest vanishes and the monthly home mortgage payment jumps dramatically. As an outcome of adjustable home loan rate resets, home foreclosures for the 1st quarter of 2006 are up 72% over the first quarter of 2005.
The foreclosure circumstance will just aggravate as rate of interest continue to increase and more adjustable home loan payments are adapted to a higher rate of interest and greater home loan payment. Moody's specified that 25% of all impressive home loans are turning up for interest rate resets during 2006 and 2007. That is $2 trillion of U.S. mortgage debt! When the payments increase, it will be quite a struck to the pocketbook. A study done by among the nation's largest title insurers concluded that 1.4 million households will face a payment dive of 50% or more once the initial payment period is over.
The 2nd factor that the real estate bubble is breaking is that new property buyers are no longer able to buy homes due to high prices and higher rates of interest. The real estate market is basically a pyramid scheme and as long as the number of purchasers is growing everything is fine. As houses are purchased by very first time home purchasers at the bottom of the pyramid, the brand-new money for that $100,000.00 home goes all the way up the pyramid to the seller and purchaser of a $1,000,000.00 house as individuals sell one home and buy a more pricey house. This double-edged sword of high real estate prices and greater interest rates has actually priced many brand-new purchasers out of the marketplace, and now we are beginning to feel the effects on the total real estate market. Sales are slowing and stocks of houses readily available for sale are increasing rapidly. The current report on the real estate market showed new house sales fell 10.5% for February 2006. This is the largest one-month drop in nine years.
The 3rd reason that the real estate bubble is breaking is that the psychology of the real estate market has actually changed. For the last 5 years the real estate market has increased drastically and if you bought real estate you more than most likely generated income. This positive return for so many financiers sustained the market greater as more people saw this and chosen to also invest in real estate before they 'lost out'.
The psychology of any bubble market, whether we are talking about the stock market or the real estate market is called 'herd mentality', where everybody follows the herd. This herd mindset is at the heart of any bubble and it has actually taken place numerous times in the past including during the US stock exchange 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 mindset had actually completely taken control of the real estate market until just recently.
The bubble continues to increase as long as there is a "higher fool" to buy at a higher price. As there are less and less "greater fools" offered or ready to purchase homes, the mania disappears. When the hysteria passes, the excessive stock that was built throughout the boom time triggers prices to plummet. This holds true for all 3 of the historic bubbles discussed above and numerous other historical examples. Also of significance to note is that when all three of these historical bubbles break the United States was thrown into economic crisis.
With the changing in frame of mind related to the real estate market, investors and speculators are getting scared that they will be left holding real estate that will lose cash. As an outcome, not only are they buying less real estate, however they are concurrently selling their investment homes as well. This is producing huge numbers of homes offered for sale on the market at the very same time that tape-record brand-new home construction floods the market. These 2 increasing supply forces, the increasing supply of existing homes for sale combined with the increasing supply of brand-new homes for sale will even more intensify the issue and drive all real estate values down.
A recent study showed that 7 out of 10 people believe the real estate bubble will rupture before April 2007. This change in the market psychology from 'must own real estate at any cost' to a healthy concern that real estate is overpriced is triggering completion of the real estate market boom.
The aftershock of the bubble breaking will be enormous and it will impact the worldwide economy greatly. Billionaire financier George Soros has stated that in 2007 the US will be in economic downturn and I concur with him. I believe we will remain in an economic crisis because as the real estate bubble bursts, tasks will be lost, Americans will no longer have the ability to cash out loan from their houses, and the entire economy will slow down considerably hence causing economic crisis.
In conclusion, the 3 factors the real estate bubble is rupturing are greater rate of interest; novice purchasers being priced out of the market; and the psychology about the real estate market is altering. The recently released eBook "How To Flourish In The Changing Real Estate Market. Safeguard Yourself From The Bubble Now!" discusses these products in more information.