The Real Estate Game is Changing

Is that loud sound you hear the real estate bubble bursting?

It’s no secret that in the last few years the US economy has been kept afloat by the large number of dollars flowing from cash-out refinancings. Watch out, because the tide is changing.

Inventories of homes for sale across the US are at a 19-year high and affordability is at a 14-year low. Statistics show that home prices have started falling and home ownership has begun to decline.

Home starts in February were down 7.9% from a year earlier and new home sales in January dropped by 5%. Wait a minute. The growth of real estate values is falling? But hasn’t that been the source of our wealth? If the real estate market is heading down won’t the economy soon follow? If you are a real estate investor, especially a leveraged investor, there could be big trouble ahead.

Recently an article in the Wall Street Journal stated: “As interest rates rise and the housing market cools, there are hints that Americans are weaning themselves off the home-equity lines of credit that have helped sustain consumer spending.”

Federal save statistics show that the quantity of home equity lines of credit have started leveling off. They had been growing at an annual rate of 30% to 40%.

The Director of the U.S. General Accounting Office has been quoted as saying “our projected budget deficits are not manageable without meaningful changes in position quo programs, policies, processes and operations and were such action implemented it would most likely adversely affect the quality of life of every American now and in the foreseeable future. The U.S. faces a demographic tsunami that will never recede.”

The Undersecretary of Treasury for International Affairs has additional “the world economy is dangerously imbalanced and the U.S. current account deficit is now at levels that many experts fear could cause a run on the dollar, soaring interest rates, and global economic pain.”

Every real estate investor should notice the words of the Chief U.S. Economist for High Frequency Economics. He states that “house price increases are going to slow much further dragging down expectations for future price gains and consequently raising real mortgage rates. This, in turn, will be the cause for a serious collapse in home sales. The housing market is a bubble, and it will burst.”

Well known author Ravi Batra is a Professor of Economics at Southern Methodist University. Here’s a quote from his book ‘The Crash of the Millennium’ where he predicts “the giant speculative bubble that we are currently in bursting, the stock market crashing and then the U.S. dollar collapsing almost closest followed by a rise in interest rates and plunging bond prices culminating in a depression made doubly damaging by rising inflation by the early part of this decade. in spite of of the inflationary character of the coming depression, character values will tumble in most parts of the United States. In the long run, home prices will probably continue to climb but in the short run, however, they could sink and sink hard.”

On a recent PBS TV program Robert Kiyusake, author of the “high Dad, Poor Dad?” series of books, warned viewers that the year 2008 would mark the beginning of a emotional change in our economy. His view of the near future is not positive.

Is a real estate collapse a sure thing? Of course not, but these words of warning should be enough to have real estate investors taking some protective actions. This is not a time to be carrying a heavy debt load. Especially not any adjustable interest rate financing.

A sensible course of action would be to only buy similarities at very thorough discounts and sell highly leveraged similarities that aren’t generating a well above average ROI. This is a time when caution may be your best investment.

Leave a Reply