The real estate market has exploded over the past five years, and as a result, many believe that real estate is the safest investment. Well, that’s no longer true. Top Real Estate Agents in Mississauga prices have risen dramatically, bringing the real estate market to price levels never before seen in history, adjusted for inflation! More people worrying about a real estate bubble means fewer real estate buyers. Fewer buyers means prices are falling.
On May 4, 2006, Fed Director Susan Blies said, “Housing really peaked.” This comes on the heels of new Fed Chairman Ben Bernanke’s concerns that the “softness” in the real estate market will harm the economy. And former Fed Chair Alan Greenspan has previously described the real estate market as a bubble. All of these top financial experts agree that there is already an actionable downturn in the market, so we need to be clear about the reasons behind these changes.
Here are 3 of the 9 reasons the real estate bubble is bursting:
- Interest rates are rising – foreclosures increased by 72%!
- First time home buyers are not priced in the market. The real estate market is a pyramid and its foundations are crumbling.
- Market sentiment has changed and people are now afraid of bursting bubbles. The real estate mania is over!
The first reason for a real estate bubble to burst is rising interest rates. Under Alan Greenspan, interest rates were historically low from June 2003 to June 2004. These low interest rates allowed people to buy a home for the same monthly cost, albeit more expensive than they could normally afford, essentially creating “free money.” However, as interest rates have risen, the era of low interest rates has ended and will continue to rise. Interest rates need to be raised to prevent inflation, in part due to higher gas and food costs. Higher interest rates make homeownership more expensive and reduce the value of existing homes.
Higher interest rates are also affecting those who purchase adjustable-rate mortgages (ARMs). Adjustable mortgages have very low interest rates and low monthly payments for the first 2-3 years, after which the low rates disappear and monthly payments increase dramatically. As a result of the adjustable mortgage rate reset, home foreclosures in the first quarter of 2006 increased by 72% compared to the first quarter of 2005.
The foreclosure situation only gets worse as interest rates continue to rise and adjustable mortgage payments adjust to higher interest rates and higher mortgage payments. Moody’s found that during 2006 and 2007, 25% of all outstanding mortgages were facing a rate reset. That’s 2 trillion in mortgage debt! An increase in the amount of payment would be a considerable blow to the notebook. A study conducted by one of the largest title insurers in the country concluded that 1.4 million households would see their payments increase by more than 50% at the end of the initial payment period.