Will The Bubble Burst
Date: Jan 26th, 2009 11:02:52 pm - Subscribe
The real estate market has indeed exploded over the past five years. The market has not seen these types of increase since the mid 1980’s. In order to determine if the “bubble” will burst in the next several years, we must first investigate what caused the boom in the first place. The “Baby Boomer” generation has reached retirement age and with it we are seeing a migration of people from the northern states to the warmer climates of Florida and other popular retirement areas.
The retirees are selling their large family homes at a pretty large profit over what they paid for them thirty years ago. This is giving the retirees a large sum of cash and puts them in a good position to buy and pay cash for a nice home or villa in a retirement area. The fact that there are many buyers with ready cash has turned this into a sellers market, and the basic rule of business applies; supply and demand. The supply of houses has not kept up with the demand and the prices have skyrocketed. Given this and the fact that the Baby Boomers are just reaching retirement age you would think that the trend would continue unabated for some time. However In my opinion, I believe that the market has and will continue to cool off for several reasons.
My reasons for believing the bubble will burst are as follows: first, the interest rates are beginning to creep up, and as they do it will force people to buy less house in order to be able to afford the monthly payments. Secondly, I believe that the energy crisis will slow the mass migration and will result in people staying in the homes they already have longer, reducing the transfer of assets and leaving their equity where it is. Retirees like to see their grandchildren and if the fuel and travelling costs continue to increase it will cause some people to stay put. As a side note, the rising cost of fuel also reduces the amount of income people have to spend on other items such as housing, and wages have not kept pace with everything else.
The final and most significant reason for my belief that the bubble will burst is because many people have done real estate speculation over the past few years and have interest only loans that will be coming due in the next 12 to 36 months. Many have not been able to turn their investments over and do not have the capital to pay off the notes that will be coming due. When this occurs, the banks will end up owning a ton of real-estate that they have been forced to foreclose on. The banks will be forced to unload the properties at a reduced rate just to get rid of it and begin collecting interest again. With a large number of properties on the market it will become a buyers market, which will drive the prices down. Then the cycle will begin again and we will see a modest increase in sale prices until we hit our next boom in about 20 years.
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