3 of the top 9 reasons the housing bubble is bursting
If you own a real estate property or are thinking about buying a property, you better pay attention, because this could be the most important message you will receive this year regarding real estate and your financial future.
The last five years have seen explosive growth in the real estate market, and as a result, many people believe that real estate is the safest investment you can make. Well, that is no longer true. Rapidly rising house prices have caused the real estate market to be at price levels never before seen in history when adjusting for inflation. The growing number of people concerned about the housing bubble means that there are fewer real estate buyers available. Fewer buyers means that prices are going down.
On May 4, 2006, Federal Reserve Board Governor Susan Blies declared that “housing has really peaked.” This follows in the footsteps of new Fed Chairman Ben Bernanke, who said he was concerned that the “weakening” of the housing market could hurt the economy. And former Fed Chairman Alan Greenspan previously described the housing market as sparkling. All of these top financial experts agree that there is already a viable recession in the market, so it is clear that you need to know the reasons behind this change.
3 of the top 9 reasons the housing bubble will burst include:
1. Interest rates are going up – foreclosures are up 72%!
2. First-time home buyers are priced out of the market – the housing market is a pyramid and the bottom line is crumbling
3. The psychology of the market has changed and now people are afraid that the bubble will burst: the mania for real estate is over!
The first reason the housing bubble bursts is the rise in interest rates. Under Alan Greenspan, interest rates were at record lows from June 2003 to June 2004. These low interest rates allowed people to buy houses that were more expensive than they could normally afford but at the same monthly cost, essentially creating “free money”. However, the era of low interest rates is over as interest rates have been rising and will continue to rise further. Interest rates must rise to fight inflation, in part because of high gas and food costs. Higher interest rates make owning a home more expensive, reducing the value of existing homes.
Higher interest rates are also affecting people who bought adjustable mortgages (ARMs). Adjustable mortgages have very low interest rates and low monthly payments for the first two to three years, but then the low interest rate disappears and the monthly mortgage payment increases dramatically. As a result of the adjustable mortgage rate readjustments, foreclosures for the first quarter of 2006 increased 72% from the first quarter of 2005.
The foreclosure situation will only get worse as interest rates continue to rise and more adjustable mortgage payments adjust to a higher interest rate and a higher mortgage payment. Moody’s stated that 25% of all outstanding mortgages will reset interest rates during 2006 and 2007. That’s $ 2 trillion of US mortgage debt! When the payments go up, it will be a big hit with the pocketbook. A study by one of the nation’s largest title insurers found that 1.4 million households will face a payment increase of 50% or more once the initial payment period ends.
The second reason the housing bubble bursts is that new home buyers are no longer able to buy homes due to high prices and higher interest rates. The real estate market is basically a pyramid scheme and as long as the number of buyers is growing everything is fine. As first-time home buyers purchase homes at the bottom of the pyramid, the new money for that $ 100,000.00 home moves up the pyramid to the seller and buyer of a $ 1,000,000.00 home as people sell. a house and buy one more. expensive house. This double-edged sword of high home prices and higher interest rates has driven many new buyers off the market, and we are now beginning to feel the effects on the broader property market. Sales are slowing and inventories of available-for-sale homes are increasing rapidly. The latest report on the housing market showed that new home sales fell 10.5% in February 2006. This is the biggest drop in a month in nine years.
The third reason the housing bubble bursts is that the psychology of the housing market has changed. Over the past five years, the real estate market has increased dramatically, and if you bought real estate, chances are you will make money. This positive return for so many investors drove the market higher as more people saw this and decided to invest in real estate as well before they were ‘lost’.
The psychology of any bubble market, whether we are talking about the stock market or the real estate market, is known as ‘herd mentality’, where everyone follows the herd. This herd mentality is at the heart of any bubble and has happened numerous times in the past, including during the American stock market bubble of the late 1990s, the Japanese housing bubble of the 1980s, and even since. the US railroad bubble of the 1870s. The herd mentality had completely taken over the housing market until recently.
The bubble keeps rising as long as there is a “bigger fool” who buys at a higher price. With fewer and fewer “old fools” available or willing to buy houses, the mania goes away. When the hysteria wears off, the excessive inventory that was built during the boom times causes prices to plummet. This is true for the three historical bubbles mentioned above and for many other historical examples. It is also important to note that when these three historical bubbles burst, the United States entered a recession.
With the change of mentality related to the real estate market, investors and speculators are afraid of being left with real estate that will lose money. As a result, they are not only buying less real estate, but they are also simultaneously selling their investment properties. This is producing a large number of homes available for sale on the market at the same time as record new home construction floods the market. These two increasing supply forces, the increasing supply of existing homes for sale coupled with the increasing supply of new homes for sale will further exacerbate the problem and reduce all home values.
A recent survey showed that 7 out of 10 people think the housing bubble will burst before April 2007. This shift in market psychology from ‘you must own real estate at any cost’ to a healthy concern that real estate is overvalued is causing the end of the housing market boom.
The aftershock of the bursting of the bubble will be enormous and will greatly affect the world economy. Billionaire investor George Soros has said that in 2007 the United States will be in recession and I agree with him. I think we will be in a recession because as the housing bubble bursts, jobs will be lost, Americans will no longer be able to withdraw money from their homes, and the entire economy will slow down dramatically, leading to a recession.
In conclusion, the three reasons why the housing bubble bursts are higher interest rates; first-time buyers are excluded from the market; And the psychology about the real estate market is changing. The recently published e-book “How To Thrive In The Changing Real Estate Market. Protect Yourself From The Bubble Now!” discuss these items in more detail.