Real Estate Bubble:-
If you are a real estate owner or are considering buying real estate, you better pay attention, as real estate and your financial future may be the most important message you receive this year.
The real estate market has experienced explosive growth over the past five years and as a result, many people believe that real estate is the safest investment you can make. Well, that’s not true anymore. Real estate prices have skyrocketed to levels never seen before in history as the real estate market adjusts for inflation! A growing number of people worried about the real estate bubble means fewer available real estate buyers. Fewer buyers mean lower prices.
On 4 May 2006, Federal Reserve Board of Governors Susan Bliss stated that “housing is really peaking”. This comes after new Fed chairman Ben Bernanke expressed concern that a “soft” real estate market would hurt the economy. And former Fed Chairman Alan Greenspan has previously described the real estate market as foam. All these top financial experts agree that there is already an effective downturn in the market, so obviously there is a need to know the reasons behind this change.
3 of the top 9 reasons the real estate bubble bursts include:
- Interest Rates Are getting up – estoppel Are Up 72%!
- First-time home buyers are kicked out of the market – the real estate market is a pyramid and the base is collapsing
- Market psychology has changed to such an extent that people are now afraid of the bubble bursting – the real estate craze is over!
The first reason the real estate bubble burst was the rise in interest rates. These low-interest rates allow people to buy homes that are more expensive than they would normally spend, but with the same monthly cost, essentially making “free money.”, the era of low-interest rates is over because interest rates are rising and will continue to rise. Interest rates must rise to counter inflation, partly due to higher gasoline and food costs. Higher interest rates make a home more expensive, thus reducing the value of existing homes.
Higher interest rates are also affecting those who buy adjustable rate mortgages (ARMs). Adjustable mortgages have very low-interest rates and low monthly payments for the first two to three years, but after that, the low-interest rates disappear and the monthly mortgage payment increases dramatically. As a result of the adjustable mortgage rate reset, there was a 72% increase in the first quarter of 2006 compared to the first quarter of 2005.
The foreclosure situation will only get worse as interest rates continue to rise and more adjustable mortgage payments are adjusted to higher interest rates and higher mortgage payments. Moody reports that 25% of all outstanding mortgages are coming towards interest rate rescheduling in 2006 and 2007. That’s $2 trillion in US mortgage debt! If the payout goes up, it will give tough competition to PocketBook. A study by one of the country’s largest title insurers has concluded that 1.4 million households face defaults of 50% or more of payments.
Another reason the real estate bubble burst was that new home buyers were unable to buy homes due to high prices and high-interest rates. The real estate market is basically a pyramid scheme and everything is fine as long as the number of buyers is increasing. Since first-time home buyers at the bottom of the pyramid buy homes, new money for a $100,000.00 home moves up the pyramid to the seller and $1,000,000.00 to the home buyer when people sell a home and buy a more expensive home.
This double-edged sword of high real estate prices and high-interest rates has driven many new buyers out of the market, and we are now starting to feel the impact on the overall real estate market. Sales are slowing down and the list of homes available for sale is growing rapidly. The latest housing market report showed that new home sales declined by 10.5% in February 2006. This is the biggest drop in a month in nine years.
The third reason the real estate bubble burst is because the psychology of the real estate market has changed. Over the past five years, the real estate market has grown dramatically, and if you buy real estate, your chances of making money are higher. This positive return propelled the market higher for many investors as more people saw it and decided to invest in real estate before defaulting.
The mentality of any bubble market, whether we are talking about the stock market or the real estate market is known as the ‘tough mentality’ where everyone follows the herd. This animal mentality is at the heart of any bubble and has happened several times in the past, including the American stock market bubble of the 1990s, the Japanese real estate bubble of the 1980s, and even the American railroad bubble of 1870. also includes. The herd mentality has completely taken over the real estate market until recently.
The bubble continues to grow until there are “big fools” buying at higher prices. As fewer and fewer “big fools” are found or willing to buy a home, the frenzy disappears. When the frenzy ends, prices drop due to the excessive inventory built up during the boom. This is true for the three documentary bubbles mentioned above and for many other historical samples. It is also important to note that the United States was in recession when these three historic bubbles burst.
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With the changing mindset regarding the real estate market, investors and speculators fear that they will liquidate real estate thereby losing money. As a result, they are not only buying less real estate, but they are also selling their investment properties at the same time. This is putting a plethora of homes available for sale on the market at the same time that record new home construction is flooding the market. These two increasing supply forces, an increasing supply of existing homes for sale and an increasing supply of new homes for sale, will exacerbate the problem and drive down all real estate values.
A recent survey found that 7 out of 10 people think the real estate bubble will burst before April 2007. There is a shift in market psychology from ‘real estate must be owned at any cost’ to a healthy concern that real estate is resulting in overvaluation. The real estate market is booming.
The aftershock of the bursting of the bubble will be huge and have a huge impact on the global economy. Billionaire investor George Soros has said there will be a recession in the US in 2007 and I agree with him. I think we will be in recession because the real estate bubble bursts, jobs will be lost, Americans will no longer be able to withdraw cash from their homes and the whole economy will go into a dramatic recession.
Finally, the three factors that caused the real estate bubble to burst were high-interest rates; First-time buyers being driven out of the market, and the psychology of the real estate market changes.
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