Re: Global Urban Property Boom -- Is it out of control? -
03-20-2007, 05:45 PM
Those talking about a "soft landing" for the real estate market right now have something to gain by fomenting public confidence in Real Estate. Mainly: Mortgage Brokers & Realtors.
What was National Association of Realtors saying last year? "It's a great time to buy a home, because now more than ever, there's so much choice afforded to buyers." They were also saying that we'd be back to price growth by the end of 2007. Check with your local Century 21 agent and I'm sure they'll have some wonderful spin about how the current situation is just a hiccup in an otherwise wonderful market.
The rotten stench coming from the subprime lending debacle is only the tip of the iceberg guys. Just like the tech bubble of the late 90s, investors have behaved like mindless sheep and bought into nonsense like "Real Estate is the only[/i sure-fire investment that always appreciates and outpaces inflation." (I actually heard that from a coworker, verbatim). People have lost their minds and are treating their homes like 401ks.
Here's the deal:
1 - The fundamentals got out of whack. People aren't earning more, they've just been gaining access to credit that's well above their pay grade. More eligible buyers = price inflation.
2 - In the states, prices are frozen because nobody wants to budge. If your home appraises at $800,000 and you've been watching gleefully as your equity racks up, you're not going let that go without a fight - especially if you've fooled yourself into thinking that prices can only go up. There's also the fact that you'll catch hell from your neighbors if you "run down the neighborhood" by undercutting percieved values. Prices aren't freefalling right now because there's not a significant volume of lower-priced homes on the market... yet.
3 - And speaking of yet. Banks aren't fond of holding on to homes, because they're liabilities on their balance sheets. 1 out of 8 subprime loans are going to default in the near-term future and will have their homes gobbled-up and spat out for fire-sale prices. Not only will there be a sudden surge of forclosed properties on the market, but there's the added knock-on effect of tighter standards for mortgage loans. More volume and a restricted pool of eligible buyers equals an inevitable drop in prices.
Count my words guys, unless there's a major natural disaster or terrorist attack - Real Estate will be the story of late 2007. Virtually overnight, the same people who have been talking about the miracle of real estate will be wondering what the hell they were thinking and how they could have been so diluded to think that growth could have continued at double-digit rates ad infinium.
There will be a double-digit correction in prices, retail will suffer and families across America will feel the pain as they choose between foreclosure or making payments on loans that exceed the value of their properties by a wide margin.