If you own land or are thinking of shopping for land then you better concentrate , because this might be the foremost important message you receive this year regarding real estate and your financial future.
Important Estate Bubble
The last five years have seen explosive growth within the land market and as a result many of us believe that land is that the safest investment you’ll make. Well, that is no longer true. Rapidly increasing real estate prices have caused the real estate market to be at price levels never before seen in history when adjusted for inflation!
The growing number of individuals concerned about the important estate bubble means there are less available land buyers. Fewer buyers mean that prices are coming down.
On May 4, 2006, Federal Reserve System Board Governor Susan Biles stated that “Housing has really kind of peaked”. This follows on the heels of the new Fed Chairman Ben Bernanke saying that he was concerned that the “softening” of the important estate market would hurt the economy.
And former Fed Chairman Alan Greenspan previously described the important estate market as frothy. All of those top financial experts agree that there’s already a viable downturn within the market, so clearly there’s a requirement to understand the explanations behind this alteration .
Top 3 Reasons that the important estate bubble will burst include:
1. Interest rates are rising – foreclosures are up 72%!
2. First time homebuyers are priced out of the market – the important estate market may be a pyramid and therefore the base is crumbling
3. The psychology of the market has changed in order that now people are scared of the bubble bursting – the mania over land is over!
The first reason that the important estate bubble is bursting is rising interest rates.
Under Alan Greenspan, interest rates were at historic lows from June 2003 to June 2004. These low interest rates allowed people to shop for homes that were costlier then what they might normally afford but at an equivalent monthly cost, essentially creating “free money”.
However, the time of low interest rates has ended as interest rates are rising and can still rise further. Interest rates must rise to combat inflation, partly thanks to high gasoline and food costs. Higher interest rates make owning a home costlier , thus driving existing home values down.
See More: Real Estate investment in US
Higher interest rates also are affecting people that bought adjustable mortgages (ARMs). Adjustable mortgages have very low rate of interest s and low monthly payments for the primary two to 3 years but afterwards the low interest rate disappears and therefore the monthly mortgage payment jumps dramatically. As a results of adjustable mortgage rate resets, home foreclosures for the first quarter of 2006 are up 72% over the first quarter of 2005.
The foreclosure situation will only worsen as rate of interest s still rise and more adjustable mortgage payments are adjusted to a better interest rate and better mortgage payment. Moody’s stated that 25% of all outstanding mortgages are arising for rate of interest resets during 2006 and 2007. That is $2 trillion of U.S. mortgage debt! When the payments increase, it’ll be quite hit to the pocketbook. A study done by one of the country’s largest title insurers concluded that 1.4 million households will face a payment jump of 50% or more once the introductory payment period is over.
The second reason that the important estate bubble
is bursting is that new homebuyers are not any longer ready to buy homes thanks to high prices and better interest rates. The real estate market is essentially a scheme and as long because the number of buyers is growing everything is ok .
As homes are bought by first time home buyers at rock bottom of the pyramid, the new money for that $100,000.00 home goes all the high the pyramid to the vendor and buyer of a $1,000,000.00 home as people sell one home and buy a costlier home.
This double-edged sword of high land prices and better interest rates has priced many new buyers out of the market, and now we are beginning to feel the effects on the overall real estate market. Sales are slowing and inventories of homes available purchasable are rising quickly. The latest report on the housing market showed new home sales fell 10.5% for February 2006. This is the most important one-month drop by nine years.
The third reason that the important estate bubble
is bursting is that the psychology of the important estate market has changed. For the last five years the important estate market has risen dramatically and if you purchased land you quite likely made money.
This positive return for so many investors fueled the market higher as more people saw this and decided to also invest in real estate before they ‘missed out’.
The psychology of any bubble market, whether we are talking about the stock exchange or the important estate market is understood as ‘herd mentality’, where everyone follows the herd. This herd mentality is at the guts of any bubble and it’s happened numerous times within 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 mentality had completely appropriated the important estate market until recently.
The bubble continues to rise as long as there is a “greater fool” to buy at a higher price. As there are less and less “greater fools” available or willing to buy homes, the mania disappears. When the hysteria passes, the excessive inventory that was built during the boom time causes prices to plummet.
See More: Real Estate Investors In USA
This is true for all three of the historical bubbles mentioned above and many other historical examples. Also of importance to note is that when all three of these historical bubbles burst the US was thrown into recession.
With the changing in mindset related to the real estate market, investors and speculators are getting scared that they will be left holding real estate that will lose money. As a result, not only are they buying less real estate, but they are simultaneously selling their investment properties as well.
This is producing huge numbers of homes available for sale on the market at the same time that 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 drive all real estate values down.
See More: USA Real Estate Payments
A recent survey showed that 7 out of 10 people think the real estate bubble will burst 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 causing the end of the real estate market boom.
The aftershock of the bubble bursting will be enormous and it will affect the global economy tremendously. Billionaire investor George Soros has said that in 2007 the US will be in recession and I agree with him. I think we will be in a recession because as the real estate bubble bursts, jobs will be lost, Americans will no longer be able to cash out money from their homes, and the entire economy will slow down dramatically thus leading to recession.
In conclusion, the three reasons the real estate bubble is bursting are higher interest rates; first-time buyers being priced out of the market; and the psychology about the real estate market is changing. The recently published eBook “How To Prosper In The Changing Real Estate Market. Protect Yourself From The Bubble Now!” discusses these items in more detail.