Posted on 08/05/2005 6:06:11 PM PDT by ex-Texan
If you are concerned about real estate values and feel that the bubble might burst, I'd suggest that you keep a close eye on long-term interest rates and the unemployment rate. If both of these rates start creeping up, it might be time for you to reconsider your investment in real estate.
Lately, so much has been written about ever-increasing real estate prices. Can these prices just go on increasing? Or will they abruptly stop, and then fall precipitously? The experts are divided on whether or not the bubble will burst. However, one thing is certain: the price rise can't go on forever.
This article will look at the forces that drive real estate values and identify changing dynamics that could ultimately bring about a real estate crash.
Jobs, Interest Rates Drive Housing Demand
Let's take a look at two factors that play very important roles in the formulation of real estate prices: employment and interest rates.
We are presently going through a period of very acceptable employment levels. Unemployment has been held down within a range that has been quite stable. Obviously this bodes well for the real estate market and for sustaining the real estate boom. If employment rates were to make a steep drop, you would inevitably find housing prices immediately softening and eventually dropping.
Real estate prices will always ultimately reflect the state of employment in the nation. Without solid employment figures, we just wouldn't have enough people entering the real estate market because they obviously wouldn't qualify for mortgage money. Also, housing prices simply can't keep increasing faster than wages do. Eventually, wage increases have to catch up to housing price increases.
The other very important factor is interest rates. The low interest rates that we are presently experiencing mean that monthly mortgage payments will stay low and more people will qualify for mortgages. In fact, the low interest rates have actually increased the amount that the average borrower can pay for a house purchase. This fact alone has made a significant contribution to the heady real estate prices that we are now experiencing.
Is Borrowing Too Easy?
I recently read an article that talked about how easy it is to get mortgage money today. So easy, in fact, that a good percentage of first-time buyers were able to purchase a house with no down payment and with all of their financing costs added to their mortgage.
In addition, there is a new mortgage instrument out that permits the buyer to borrow money and make no principal payments for a certain number of years: interest-only mortgages. This new type of mortgage grants credit to people who heretofore would not have qualified for a mortgage. And, this mortgage has been labeled the "smart mortgage." I'm sure that you can readily see how this type of easy credit puts tremendous steam into real estate values.
Lending institutions are relying on the sustainability of real estate values to assure them that their loans will ultimately be collected. The question is, can these high real estate values be sustained in the long run?
Long-term rates are staying low, and have actually decreased of late, no matter how much the Fed tries to keep them in check. What's going on here? The fact is, we are now in the midst of quite a strange phenomenon. As the Fed keeps pushing up short-term interest rates, long-term rates have either stayed steady or declined. Even Alan Greenspan, the chairman of the Federal Reserve, is hard put to explain this "anomaly."
The fact is, low long-term interest rates give fuel to rising real estate prices. The only problem is, no one seems to know why the rates are staying so low or when they'll start going up.
To fully understand why we are in the midst of a housing boom, we have to look at who is investing in our mortgage debt, who is providing us with so much money. As strange as this might sound, China is a major investor in the U.S. and its mortgage debt.
Since we are buying so many Chinese products, and other countries' products as well, China and other countries have to do something with the money they are getting from us. What they are doing is putting it right back here by purchasing our debt. Much of that debt is government debt, a great deal of which is mortgage debt.
Will Foreigners Continue to Buy Our Debt?
If you take a look at an article that I wrote for The E-Commerce Times, The Dollar's Falling! Does It Really Matter?, you'll have a better idea of why China and other countries are buying so much of our debt and the long-term dangers of their doing so.
I guess the big question is, how long will other countries be content with buying U.S. debt? No one knows for sure. However, if we finally put our fiscal house in order and start balancing our budgets, these countries will have more incentive to continue to purchase our debt.
Also, we really have to do something about our current account deficit. We are purchasing too many foreign goods and not selling enough of our goods to foreign countries.
The above two factors, balanced budgets and bringing more balance to our trade with foreign countries, would go a long way toward keeping foreign investors interested in purchasing dollar-denominated debt.
Lesson From Down Under
Australia has had a housing boom that now seems to have subsided. Prices in some areas have gone flat and in other areas have actually dropped. One factor that might have put some control on runaway housing prices in Australia is the action by the Reserve Bank of Australia, the equivalent of our Federal Reserve, to do some "stress testing" of its banks.
What they did was create scenarios of unemployment and interest rates increasing to certain levels to see how banks would have survived this double-barreled "stress." Though the banks did quite well, the actual exercise put a pall on their aggressive lending practices. This fact alone seems to have calmed housing markets in Australia.
If you are concerned about real estate values and feel that the bubble might burst, I'd suggest that you keep a close eye on long-term interest rates and the unemployment rate. If both of these rates start creeping up, it might be time for you to reconsider your investment in real estate.
Good Luck!
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Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public.
What I do understand is people in their twenties and thirties are buying real estate on interest only loans. First time home buyers are leaping at the chance to buy property on adjustable rate mortages. Both these recent trends are distubing to me because they suddently appeared out of the blue. Never before in history have homes been sold that way in the U.S. . . . Read More About Bubbles? . . .That ought to tell you something. Does it? Does it really?
The author just said:
If you are concerned about real estate values and feel that the bubble might burst, I'd suggest that you keep a close eye on long-term interest rates and the unemployment rate. If both of these rates start creeping up, it might be time for you to reconsider your investment in real estate. . . . Good Luck!
The author just gave you a hint about two key factors. But the real information is hiding in the open like cards left face up on the table. Take another look. Looking at the homes we live in like a speculative investment is dangerous. Never before has a nation borrowed so heavily on its future to make investments in this particular manner. The clock is ticking . . .
Bubble freak....
If I had an acre for every story in the last 10 or 15 years forcasting the bursting of the housing bubble, I'd own your state by now....or Alaska for that matter! Same thing with stories about how gold is going to break out again.
Shoot, just the bubble stories ex-Texan has posted in the last couple of months alone would make you very rich.
If you make some money fine, I was glad to be out of the rain.
Tiny bubbles
In the wine
Make me feel happy
All the time
Where's Don Ho when you need him?
If you have food in your belly, clothes on your body and a warm place to sleep - everything else is extra.
bttt
The UK housing market in down between 10-20% year to date, and as a result, personal bankrupcies are the highest since 1960. This is due to excess leverage. The same applies on this side of the pond. The Fed is only part way through their increases.
The article looks like a DNC wish list for economic disaster.
Real estate bubble don't burst, they deflate slowly for a few months, hold for a few years then expand again.
You need to expand your perameters just a wee bit more, and I'll slam you with a hell of an example.
Just take it back to the late 1980's...
> The article looks like a DNC wish list for economic disaster.
Everything else they've wished for, has inverted their
predictions. They move onto new turf.
They are trying to be the pin that bursts this bubble.
Problem is, the supply of people keeps increasing, as
do salaries, and any few speculators who get clipped
by isolated dips will be swept aside by people who just
want to live in the properties.
Next, they'll tell us that the auto market is about
to collapse.
Agreed, it will go down down down they up again years later.
It is a great investment over time, but I think the bad loans will bring large supplies back to the financial institutions in far greater numbers than ever before with these new crazy loans.
The problem with real estate invesments in the late 80's was Congress.
Congress passed major tax changes and RE investment was no longer profitable.
There's only a finite amount of land in America, and God isn't making any more. The population continues to grow. Does that not tell you something about supply and demand?
Real estate bubbles burst in slow motion. It will take years to work its way out.
"Grasshopper, is like the sound of one hand clapping . . ."
The fed is going to raise rates again. Ten times in a row.
Yep and consistently we have bought at the top and sold after a long doldrums only to see our sold property doubling in value in a year or two.
What disturbs me are the interest only adjustable rate mortgages young people are getting. When their prop taxes double and those rates go up, there is going to be hell to pay.
Adj rates have been great but I think they are risky now.
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