If you own real estate or are considering buying a property, then you might want to listen to the following information because this might be the most essential message you get this year
relating to your financial future.
The last five years have seen explosive development in the real estate market and as a result many individuals think that real estate properties are the safest financial investment you can make.
Rapidly increasing costs in this market have triggered prices to levels that have never been seen before in history when adjusted for inflation!
This follows on the heels of the Fed Chairman stating that he was concerned that the “softening” of the real estate market would put a tremendous hurt on the economy.
Three factors that the real estate bubble will break are as follows:
1. Interest rates are increasing – foreclosures are up 72%!
2. Homebuyers are priced out of the market the real estate market is a pyramid and the base is falling apart.
3. The psychology of the marketplace has changed so that people are now leery of the bubble breaking. The mania over real estate is over!
The first factor that the real estate bubble is bursting is the increase in interest rates. The time of low interest rates has actually ended as interest rates have been increasing and will continue to increase
even more. Higher interest rates make owning a house more pricey, therefore driving existing home worth down.
Greater rates of interest are also impacting individuals who bought adjustable mortgages (ARMs). Adjustable home loans have really low rate of interest and low monthly payments for the first 2 to 3 years
but afterwards the low rate of interest vanishes, and the regular monthly mortgage payment increases considerably.
The foreclosure situation will only become worse as interest rates continue to increase and more adjustable home mortgage payments are adjusted to a bigger mortgage payment. Moody’s specified that 25%
of all outstanding home loans are coming up for interest rate resets.
The second reason that the real estate bubble is showing signs of bursting is brand-new homebuyers are
no longer able to purchase houses due to high prices and greater interest rates. The real estate market is basically a pyramid scheme and as long as the number of purchasers is growing everything is great.
This double-edged sword of high home prices and increasing interest rates has priced numerous brand-new buyers out of the market. And, we are now starting to feel the results on the overall real estate market.
The third reason that the real estate bubble is bursting is that the psychology of the home market has actually shifted. For the last five years the home market has actually risen dramatically and if you bought property
you more than likely generated income. This favorable return for a lot of investors fueled the market even more as more potential buyers saw this as an opportunity to purchase properties prior to them ‘missing out’.
The psychology of any bubble market, whether we are discussing the stock market, or the real estate market is called ‘herd mentality’. Its where everybody follows the herd.
This herd mindset is at the heart of any bubble and it has actually taken place many times in the past. An example of this is the stock exchange bubble of the late 1990’s, the Japanese real estate bubble of the 1980’s, and
even as far back as the United States railway bubble of the 1870’s.
The bubble will continue to increase as long as there are more “fools” to purchase property at a higher cost. As there are less and less “fools” available to buy houses, the mania vanishes.
When the hysteria passes, the excessive stock that was built during the boom will cause rates to plummet. This holds true for all 3 of the historic bubbles mentioned above and lots of other historic examples. What is also
important to note is that when all 3 of these historic bubbles burst the United States was tossed into economic crisis.