Real Estate
3 of the top 9 reasons the housing bubble is bursting

3 of the top 9 reasons the housing bubble is bursting

If you own real estate or are thinking about buying real estate, you better pay attention, because this could be the most important message you 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 to make. Well, that’s not true anymore. The rapid increase in real estate prices has caused the real estate market to be at price levels never seen before in history when adjusted for inflation! The growing number of people concerned about the housing bubble means that there are real estate buyers available. Fewer buyers means prices are falling.

On May 4, 2006, Federal Reserve Board Governor Susan Blies stated that “housing has really peaked.” This follows in the footsteps of new Fed Chairman Ben Bernanke saying he was concerned that “softening” in the housing market would hurt the economy. And former Fed Chairman Alan Greenspan previously described the housing market as frothy. All of these top financial experts agree that there is already a viable downturn in the market, so there is clearly a need to know the reasons behind this change.

3 of the top 9 reasons the housing bubble will burst include:

1. Interest rates are rising: Foreclosures are up 72%!

2. First time homebuyers are priced out of the market: the real estate market is a pyramid and the foundation is crumbling

3. The psychology of the market has changed, so now people are afraid that the bubble will burst: the real estate mania is over!

The first reason the housing bubble is bursting is rising 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 time of low interest rates is over as interest rates have been rising and will continue to rise even higher. Interest rates must rise to combat inflation, in part because of high gas and food costs. Higher interest rates make home ownership more expensive, reducing the value of existing homes.

Higher interest rates are also hitting people who bought adjustable-rate mortgages (ARMs). Adjustable mortgages have very low interest rates and low monthly payments for the first two or three years, but then the low interest rate disappears and the monthly mortgage payment increases dramatically. As a result of adjustable mortgage rate resets, foreclosures in the first quarter of 2006 increased 72% over 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 higher mortgage payment. Moody’s stated that 25% of all outstanding mortgages will reset in interest rate during 2006 and 2007. That’s $2 trillion of US mortgage debt! When the payments go up, it will be a huge blow to your 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 introductory payment period ends.

The second reason the housing bubble is bursting is that new home buyers can no longer 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 grows, all is well. As first-time homebuyers purchase a home at the bottom of the pyramid, the new money from 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 a more expensive house. . This double-edged sword of high home prices and higher interest rates has driven many new buyers out of the market, and we are now starting to feel the effects in the broader housing market. Sales are slowing down and inventories of homes available for sale 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 monthly drop in nine years.

The third reason the housing bubble is bursting is that the psychology of the housing market has changed. Over the last five years, the real estate market has increased dramatically and if you bought real estate, chances are you made money. This positive return for so many investors drove the market higher as more people saw this and decided to also invest in real estate before they were “lost”.

The psychology of any bubble market, whether we’re 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 occurred numerous times in the past, including during the US stock market bubble of the late 1990s, the Japanese housing bubble of the 1980s and even since the US rail bubble of the 1870s. The herd mentality had completely taken over the real estate market until recently.

The bubble continues to rise as long as there is a “major sucker” to buy at a higher price. As there are fewer and fewer “older fools” available or willing to buy houses, the craze fades. When the hype wears off, the excess inventory built up during the boom times causes prices to plummet. This is true for the three historical bubbles mentioned above and many other historical examples. It is also important to note that when these three historic bubbles burst, the US entered a recession.

With the change in mindset related to the real estate market, investors and speculators are afraid of holding on to real estate that will lose money. As a result, they are not only buying less real estate, they are also selling their investment properties. This is producing a large number of homes available for sale on the market at the same time record new home construction floods the market. These two forces of increasing supply, the increasing supply of existing homes for sale along with the increasing supply of new homes for sale will further exacerbate the problem and drive down all real estate values.

A recent poll showed that 7 out of 10 people think the real estate 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 are overvalued is bringing about the end of the housing market boom.

The aftershock of the bursting of the bubble will be enormous and will affect the global economy tremendously. Billionaire investor George Soros has said that in 2007 the United States will enter a 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 take money out of their homes, and the entire economy will slow down dramatically, leading to a recession.

In conclusion, the three reasons the housing bubble is bursting are higher interest rates; first-time buyers are left out of the market; and the psychology about the real estate market is changing. The recently released e-book “How to Prosper in the Changing Real Estate Market. Protect Yourself from the Bubble Now!” discuss these elements in more detail.

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