Three of the top nine reasons why the real estate bubble is in full-swing are listed below.
If you have real estate , or are considering purchasing real estate then you better pay attention, because this could be the most important announcement you receive this year regarding real estate and your financial future.
Over the last five years, the real estate market has seen an explosive increase. Because of this, many people believe that real estate can be the most reliable investment. It's not the case anymore. The rapid rise in real estate prices have led to the real estate market to reach prices that have never been seen before in history that have been adjusted to inflation! There are fewer buyers of real estate because of the growing concern over the real estate bubble. With fewer buyers, prices are dropping.
Federal Reserve Board Governor Susan Blies stated, on May 4 April, 2006 "Housing is really peaked". This came on the heels of the new Fed Chairman Ben Bernanke saying that he was concerned that the "softening" of the real estate market could affect the economy. Also, former Fed Chairman Alan Greenspan previously described the real estate market as"foolish. All of these top financial experts agree that there's already a feasible downturn in the market, therefore there is a need to know the reasons behind this change.
Three of the top 9 reasons that the real estate bubble could burst are:
1. Inflation has risen 72% as interest rates rise
2. First-time homebuyers are priced out of the market.
3. The market is now frightened of the bursting of bubbles, and the way people view the market has changed. The mania surrounding real estate has ended!
The rising interest rates are the main reason that the real estate bubble is burst. From June 2003 to June 2004, interest rates sank to an all-time low , under Alan Greenspan. These low rates helped people to purchase homes for a higher price than what they could afford. However, the monthly cost was still affordable. This led to "free money". However, the era of interest rates that were low has ended because interest rates are rising and will continue to increase. To fight against inflation, interest rates have to be raised due to rising food and fuel costs. The higher rates of interest mean the purchase of a home is more expensive and lowers existing house values.
People who have adjustable mortgages (ARMs) are additionally affected by the higher interest rates. In the first 2 to 3 years, adjustable mortgages provide extremely low interest rates as well as a very low monthly payments. After that, the interest rate drops and the monthly mortgage payments increases dramatically. The rate of adjustment for adjustable mortgages have resulted in home foreclosures rising 72% over the first quarter.
The foreclosure crisis will only get worse as the interest rate continues to rise and more adjustable mortgage payment are adjusted to a greater interest rate as well as a greater mortgage payments. Moody's said that 25% of all mortgages in America are up for interest rate adjustments between 2006 between 2006 and 2007. That is $2 trillion of U.S. mortgage debt! If the mortgage payment increases the amount, it's an enormous burden on the budget. An analysis conducted by one of the nation's most renowned title insurers found that 1.4 million households are likely to face a payment jump of 50 percent or more by the time the initial payment period is over.
Another reason that the real estate bubble has in full-swing is that new home buyers are unable to buy homes due high interest rates and the high cost of homes. The market for real estate has been a pyramid scheme and as long as the amount of buyers continues to increase, everything is fine. The new money to buy that $100,000.00 home is utilized by first-time buyers at the bottom. Then it goes up to the $1,000,000.00 home buyer and seller. As people sell their homes and purchase larger homes the pyramid becomes a scheme. The double-edged saber that is the high cost of real estate and the higher interest rates have made many buyers leave the market and we are starting to see the impact on the real market for real estate. There are fewer houses on the market and sales are falling. However, inventories are growing rapidly. New home sales declined 10.5 percent in February, according to the most recent report on the housing market. This is the largest one-month decline in the last nine years.
The mindset of the real estate market has changed, which is the third reason for why the bubble in real estate is about to burst. In the last five years, the real estate market has seen an explosive rise and you can make plenty of money if you invest in real property. This positive return for so many investors helped propel the market as more people saw this and decided to invest in real estate prior to when they "lost out"..
The psychology of any bubble market, regardless of whether it's the stock market or the real estate market is known as "herd mentality," where everybody follows the herd. The herd mentality is at the very core of any market bubble. This was apparent in the US stock market bubble of the late 1990's, in the Japanese real estate bubble in the the 1980's and the US railway boom of the 1870's. The market for real estate was controlled by the herd mentality up to recent years.
Insofar as there are "greater fools" willing to buy houses at higher rates, the bubble will continue to grow. The mania will fade as there are less "greater fools" in a position to buy homes. After the hysteria has passed and the inventory overflow that was created during the boom time causes prices to plummet. This applies to all the previous bubbles mentioned above, and joseph suyran many other examples. Important to be aware of is that after all three of these historical bubbles burst, the US was thrown into recession.
Investors and speculators fear that losing property values will be the result of the change in thinking. Therefore, not only are they purchasing less real estate, but they are simultaneously selling their investment properties , too. The result is huge numbers of houses available for sale in the same time as record numbers of new homes are flooding the market. The increasing supply of homes available for sale, along with an increase in the number of houses for rent will only compound the problem and reduce the cost of real estate.
A recent survey showed that 7 out of 10 respondents believe that the real-estate bubble will burst before April 2007. This change in the mentality of the market from'must buy real estate at any cost to a healthy concern that real estate prices are too high is causing the end of the real estate market's boom.
The effects of the burst bubble will be enormous and it will affect the global economy enormously. The billionaire investor George Soros has said that 2007 will be the year that the US is likely to be in recession and I agree with the statement of. We will experience a recession as soon as the bubble in real estate bursts. Americans will lose their jobs and won't be able cash in their savings. The whole economy will slow, leading to recession.
The three reasons the bubble in real estate is in the process of bursting are higher interest rates; first-time buyers being priced out of the market; and way of thinking about the market is changing. The new ebook "How To Prosper In The Market" that is changing the real Estate Market. Protect Yourself From The Bubble Now!" discusses these topics in greater in depth.
