Three of the top nine reasons that the real estate bubble has burst are listed below
If you own real estate or are considering buying real estate then you better be aware of this, as it could be the most important message you receive this year in regards to real property and your financial future.
The past five years have seen explosive growth in the real estate market and as a consequence, many people think that investing in real estate is the most secure investment you can make. But that's no longer the scenario. The market for real estate is witnessing an unprecedented increase in real estate prices which has resulted in unprecedented price hikes. In light of the increasing concerns over the real estate bubble, there are fewer buyers for real estate. There are less buyers which results in prices falling.
On May 4, 2006 Federal Reserve Board Governor Susan Blies said that "Housing is really been at its peak". 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 would affect the economy. The former Fed Chairman Alan Greenspan previously described the real estate market as"foolish. Every financial expert agrees that there is a recession in the market, and there is an urgent need to find out the reason.
Here are the top 9 reasons the real estate bubble might be bursting:
1. Inflation has risen 72% while rates of interest rise
2. First-time homebuyers are priced out of the market. The real market for real estate is a pyramid. The base is falling away
3. The market is now frightened of the bubble burst, and the psychology of the market has changed. The mania over real property is over!
Rising interest rates are one of the main reasons to explain why the real estate bubble has burst. In June 2003, interest rates dropped to an all-time low. This was under Alan Greenspan. The low interest rates allowed people to purchase homes for more than they could otherwise be able to afford. But, the cost of a monthly mortgage was affordable. This led to "free cash". In the current economic climate, low interest rates are no anymore an option. In reality the rates of interest are increasing steadily and are expected to continue rising. Rates of interest must increase to combat inflation, partly due to rising gasoline prices and food costs. A higher rate of interest makes owning an apartment more expensive, making the home's value lower.
Adjustable mortgages (ARMs) that are subject to increased interest rates, may be affected too. Adjustable mortgages have very low rates of interest and very low monthly charges for the first 2 to three years but afterwards the interest rate is low and the monthly mortgage payments increases dramatically. Because of the adjustments to mortgage rates, home foreclosures in the first quarter of 2006 are up 72% over the 1st quarter of 2005.
As interest rates rise and mortgages are more flexible, more payments are made to adjust to an increase in interest and a higher mortgage payment. This is only going to make the foreclosure problem more difficult. Moody's reported that 25% of all mortgages in the United States are scheduled for interest rate resets in the period between 2006 between 2006 and 2007. The figure is around $2 trillion in U.S. mortgage debt. When mortgage payments go up by 50%, it'll be an enormous blow to the pocketbook. According to a research conducted by one of the largest title insurance companies in America, 1.4 million households will be able to see their bills increase by 50% or more after the introductory period.
Another reason behind the real housing bubble burst was that buyers no longer have the option of purchasing homes due to the rising cost of homes and increased interest rates. The real estate market works as the pyramid system. If there are buyers, it's all good. First-time home buyers on the low end of the pyramid purchase homes. The funds used to purchase a $100,000.00 property then climbs in the pyramid, to become buyers and sellers of the $1,000,000.00 property. People sell one home and go on to purchase the larger house. The double-edged weapon that is higher real estate prices and a higher interest rate have forced many buyers to leave the market, and we are starting to see the effects on the real estate market. Sales are declining, while inventories of homes that are available for sale are increasing quickly. According to the latest housing market report, the number of new home sales dropped 10.5% in February 2006. This is the ninth-largest one-month drop in nine year.
The psychology of the real-estate market has changed. This is the third reason for why the real estate bubble has burst. Over the last five years the market for real estate has seen a dramatic increase and if you invested in real estate you most likely earned money. This high return for many investors helped propel the market to higher levels as more people saw this and decided to also buy real estate before they 'missed out'.
The psychology behind any market that is a bubble, whether real estate or the https://www.cbhometour.com/35257-Cornwall-Place-Newark-CA-94560/index.html stock markets, is known as "herd mentality". It refers to the belief that all people follow the same herd. Herd mentality is central to any bubble and has been seen several times over the years, including the US stock market bubble of the late 1990's, Japanese real estate bubble of the 1980's, and even as long as the US railroad bubble of 1870's. The herd mindset had totally dominated the real estate industry until recently.
So long as there are "greater fools" willing to buy homes with higher prices, the inflation will continue to rise. The mania will recede as fewer people are ready or able purchase homes. The excess inventory created during the boom time period results in prices falling when the mania is over. This is the case for all three historical bubbles, and a variety of other examples from history. It is important to keep in mind that the US was in recession following all three historical bubbles burst.
Investors and speculators are more worried regarding the prospects for the real estate market. They are concerned about losing investment properties. As a result, not only are they buying less real estate, but they are simultaneously selling their investment properties , too. At the same time, record-breaking new home construction creates a flood of markets, creating an abundance of homes available for sale. The growing number of homes for saleand an increase in the number of houses available for rent, will only increase the problem and lower real estate prices.
In a recent study 7/10 of people believe that the bubble in real estate is likely to explode before April 2007. The shift in psychological mindset of buyers to own property at all costs to a healthy concern http://www.bbc.co.uk/search?q=real estate that real estate prices are overvalued is causing the end of the real estate market boom.
The repercussions of the burst bubble is huge and can affect the world economy in a huge way. George Soros, a billionaire investor, has declared that the US will be in recession by 2007. I'm in agreement with his assertion. Because of the burst real property bubble, Americans won't be able cash out their savings and jobs will be cut. I am convinced that we will begin to enter recession.
The three primary reasons for caused the bubble to burst is rising interest rates, new buyers getting priced out and changing psychology. "How to Prosper in a Changing real Estate Market" is a newly published eBook. Take the necessary precautions to avoid the Bubble Now!" discusses these topics in greater in depth.