Will the Real Estate Bubble Burst?
How long can prices rise before no one can afford to buy? In a nutshell, that is
the basic question that is niggling at the back of our collective subconscious
when we talk about the real estate bubble.
Real estate is appreciating at staggering rates - as much as 19% in some counties
in Florida according to state officials. Meanwhile, on the financing scene, interest
rates are low - and staying there. Low interest rates mean lower monthly mortgage
payments - which means that many people are able to borrow MORE and afford larger
mortgages and more expensive houses. Couple the astronomical increase in real estate
value with the continuing trend of low interest rates, and you have a sizzling hot
real estate market that just keeps getting hotter as investors jump on board to
get their piece of the real estate pie.
Which leads people who know finances and the market to question how long it can last.
A major part of that answer is in the question that opened this article. Prices will
continue to rise until they reach the point where most people can no longer afford
to buy.
Another part of the answer is in the fact that the real estate bubble is extremely
localized - and it's localized in some of the larger media centers around the country.
Florida, California, Massachusetts, New York - those states are seeing unprecedented
rises in housing and real estate prices. According to national reports, the median
price for a home in the United States rose 14.7% over the last twelve months. That
percentage is deceiving though. Take a look at some more local figures to get a
clearer look at the reality.
If you live in California, home appreciation rose up 25.4%. In Nevada, the median price
of a home rose 31.2%. In Hawaii, the figure was 24.4%, in Washington,
D.C., 22.2% and in Florida up 21.4%. But to a large extend, most of the rest of the country
is NOT seeing those sorts of astronomical increases in value. If you're
buying in Mississippi, for instance, home prices have appreciated at a more
reasonable 4.9%. Even in the Northeast, where a two bedroom home in Boston can
easily sell for $400,000, if you take a short drive outside the city to the western
half of the state, you'll still find 3 and 4 bedroom homes selling in the low $100's - and less.
What's it all mean? Among other things, it means that the dangers of a real
estate 'crash' are as localized as the effects of the real estate bubble. It means
that the foreseen losses are more likely to be smaller profits rather than actual
losses. To quote a Florida economist, "The people who think it's a big bubble see
a big crash. We just see deceleration. You don't have to worry about house prices
going down."
The bad news may be for those who see real estate as a get-rich-quick proposition.
One of the most popular investment 'schemes' of recent years has been 'flipping
houses' - the practice of buying a house, then reselling it within a six to twelve
months for a profit. When real estate prices are rising at 20 - 30% per year,
there's a great deal of money to be made that way. A down payment of $10,000 can
effectively double or triple your money in less than a year. According to conservative
estimates, though, real estate prices need to rise by at least 15% a year to even
cover your closing costs if you sell in less than a year.
Does that mean that you'll LOSE money on your purchase if real estate prices
stabilize and drop back to their more usual 5 - 8% per year rise? Of course not!
It simply means that real estate goes back to being what it has always been - a
good, solid, long-term investment. It means that speculators looking to make a
quick buck will have to re-adjust their expectations - and either find a different
'product' - or hold their properties longer before selling.
Either option is good news for the 'classic' real estate investor, or the
average home buyer who is looking for an affordable house for himself and his
family. Prices will stabilize and even drop a little - but the bottom won't fall
out of the real estate market. In the long run, house values will
recover and bypass previous highs. When that happen, the typical real estate owner/investor will
still end up with a house and land that's worth more than what he paid for it.
And all the naysayers and panic mongers can stop predicting the resounding crash
of the real estate bubble falling to earth.
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