3 of the top 9 reasons why real estate bubbles burst

If you own real estate or are considering buying real estate, you better pay close attention because this could be the most important message you receive this year regarding real estate and your financial future.

The past 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 you can make. Well, that’s no longer true. The rapid increase in real estate prices has caused the real estate market to reach historic highs, when adjusted for inflation! The growing number of people concerned about a real estate bubble means there are fewer available real estate buyers. Fewer buyers mean prices are falling.

On May 4, 2006, Federal Reserve Board Governor Susan Bliss stated that “housing has reached a very high level.” This comes after the Fed’s new chairman, Ben Bernanke, expressed concern that a “softening” of the real estate market would hurt the economy. And former Fed Chairman Alan Greenspan has previously described the real estate market as a bubble. All these senior financial experts agree that there has already been an effective decline in the market, so it is clear that it is necessary to clearly understand the reasons behind this change.

3 of the 9 main reasons real estate bubbles burst include:

  1. Interest rates are rising – reservations are up 72%!

  2. When first time home buyers are priced out of the market – the real estate market is a pyramid and the base is collapsing.

  3. The psychology of the market has changed so that now people fear the bursting of the bubble – the real estate mania is over!

The number one reason real estate bubbles burst is rising interest rates. Under Alan Greenspan, interest rates were at historic lows from June 2003 to June 2004. These low interest rates allow people to buy homes that are more expensive than they would normally be able to afford, but with the same monthly cost. However, as interest rates continue to rise, the era of low interest rates is over and will continue to rise. Interest rates must rise to fight inflation, partly due to higher fuel and food prices. Higher interest rates make home ownership more expensive, thus lowering current home values.

High interest rates are also hurting people who bought adjustable rate mortgages (ARMs). Adjustable mortgages have very low interest rates and low monthly payments for the first two to three years, but then the low interest rate disappears and the monthly mortgage payment jumps dramatically. Because of the adjusted mortgage rate reset, mortgages for the 1st quarter of 2006 were up 72 percent from the 1st quarter of 2005.

As interest rates continue to rise and more adjustable-rate mortgage payments adjust to higher interest rates and higher loan payments, the mortgage situation will worsen. Moody’s noted that 25 percent of mortgage interest rates in 2006 and 2007 were coming up for reset. That means $2 trillion in US mortgage debt! As the fees go up, it hurts the pocketbook. A study by one of the nation’s largest title insurers has concluded that 1.4 million households face a 50% or greater premium jump after the introductory payment period ends.

The second reason for the bursting of the real estate bubble is that new home buyers are unable to afford a home due to high prices and high interest rates. The real estate market is basically a pyramid scheme and as long as the number of buyers is growing, everything is fine. As first time home buyers buy houses at the bottom of the pyramid, the new money paid for that $100,000.00 house goes up the pyramid to the seller and the $1,000,000 house is bought when people sell a house and buy a much more expensive house. . This double-edged sword of high real estate prices and high interest rates has driven many new buyers out of the market, and now we are starting to feel the impact on the real estate market as a whole. Sales are slowing and the inventory of homes for sale is growing rapidly. The latest report on the housing market showed that new home sales for February 2006 were down 10.5%. This is the largest one-month reduction in nine years.

The third reason the real estate bubble burst is because the psychology of the real estate market has changed. The real estate market has increased significantly over the past five years and you can make a lot of money if you buy real estate. This boosted the market with positive returns for many investors, many people saw this and decided to invest in real estate before they ‘missed out’.

Whether we are talking about the stock market or the real estate market, the bubble market psychology is known as ‘herd mentality’ where everyone follows the herd. This herd mentality is at the heart of any bubble and has happened many times before during the US stock market bubble of the late 1990s, the Japanese real estate bubble of the 1980s, and the US railroad bubble. 1870s. The herd mentality completely dominated the real estate market until recently.

As long as there is a “greater fool” who buys higher prices, the bubble will continue to inflate. As the number of “great fools” who are willing to buy or buy houses diminishes, the mania will fade. When the hysteria passes, the excess inventory built up during research leads to inflation. This is true for all three historical bubbles mentioned above and many other historical examples. Also worth noting is that when all three of these historic bubbles burst, the US was thrown into recession.

Investors and speculators are fearing that they will be left with a loss-making real estate portfolio due to a shift in thinking about the real estate market. As a result, they are not only buying small real estate, but also selling their investment property at the same time. This new home construction has flooded the market producing many homes for sale on the market at the same time. These two increasing supply forces, the increasing supply of existing homes combined with the supply of new homes, will exacerbate the problem and drive down all real estate prices.

According to a recent survey, 7 out of 10 people think that the real estate bubble will burst before April 2007. This change in the market mentality of ‘must own real estate at any cost’ to a healthy risk of rising real estate prices has led to the end of the real estate market boom.

The aftershocks of the bubble burst will be huge and have a profound impact on the global economy. Billionaire investor George Soros said in 2007 that the US was going into recession and I agree with him. When the real estate bubble bursts, jobs will be lost, Americans will be unable to cash out of their homes, and the overall economy will shrink dramatically, leading to a recession.

In summary, the three reasons for the bursting of the real estate bubble are high interest rates; When first time buyers are priced out of the market; And the psychology of the real estate market is changing. The recently published e-book “How to Get Rich in the Real Estate Market. Protect Yourself from the Bubble Now!” He talks about these things in more detail.

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