3 of the top 9 reasons that the real estate bubble is bursting

If you own real estate or are thinking of buying real estate then you better pay attention, because this could be the most important message you receive this year regarding real estate and your financial future.

The last five years have seen explosive growth in the real estate market and as a result many people believe that real estate is the safest investment you can make. Well, that is no longer true. Rapidly increasing real estate prices have caused the real estate market to be at price levels never before seen in history when adjusted for inflation! The growing number of people concerned about the real estate bubble means there are less available real estate buyers. Fewer buyers mean that prices are coming down.

On May 4, 2006, Federal Reserve Board Governor Susan Blies stated that "Housing has really sort of peaked". This follows on the heels of the new Fed Chairman Ben Bernanke saying that he was concerned that the "softening" of the real estate market would hurt the economy. And former Fed Chairman Alan Greenspan previously described the real estate market as frothy. All of these top financial experts agree that there is already a viable downturn in the market, so clearly there is a need to know the reasons behind this change.

3 of the top 9 reasons that the real estate bubble will burst include:
1. Interest rates are rising - foreclosures are up 72%!
2. First time homebuyers are priced out of the market - the real estate market is a pyramid and the base is crumbling
3. The psychology of the market has changed so that now people are afraid of the bubble bursting - the mania over real estate is over!

The first reason that the real estate bubble is bursting is rising interest rates. Under Alan Greenspan, interest rates were at historic lows from June 2003 to June 2004. These low interest rates allowed people to buy homes that were more expensive then what they could normally afford but at the same monthly cost, essentially creating "free money". However, the time of low interest rates has ended as interest rates have been rising and will continue to rise further. Interest rates must rise to combat inflation, partly due to high gasoline and food costs. Higher interest rates make owning a home more expensive, thus driving existing home values down.

Higher interest rates are also affecting people who bought adjustable mortgages (ARMs). Adjustable mortgages have very low interest rates and low monthly payments for the first two to three years but afterwards the low interest rate disappears and the monthly mortgage payment jumps dramatically. As a result of adjustable mortgage rate resets, home foreclosures for the 1st quarter of 2006 are up 72% over the 1st quarter of 2005.

The foreclosure situation will only worsen as interest rates continue to rise and more adjustable mortgage payments are adjusted to a higher interest rate and higher mortgage payment. Moody's stated that 25% of all outstanding mortgages are coming up for interest rate resets during 2006 and 2007. That is $2 trillion of U.S. mortgage debt! When the payments increase, it will be quite a hit to the pocketbook. A study done by one of the country's largest title insurers concluded that 1.4 million households will face a payment jump of 50% or more once the introductory payment period is over.

The second reason that the real estate bubble is bursting is that new homebuyers are no longer able to buy homes due to high prices and higher interest rates. The real estate market is basically a pyramid scheme and as long as the number of buyers is growing everything is fine. As homes are bought by first time home buyers at the bottom of the pyramid, the new money for that $100,000.00 home goes all the way up the pyramid to the seller and buyer of a $1,000,000.00 home as people sell one home and buy a more expensive home. This double-edged sword of high real estate prices and higher interest rates has priced many new buyers out of the market, and now we are starting to feel the effects on the overall real estate market. Sales are slowing and inventories of homes available for sale are rising quickly. The latest report on the housing market showed new home sales fell 10.5% for February 2006. This is the largest one-month drop in nine years.

The third reason that the real estate bubble is bursting is that the psychology of the real estate market has changed. For the last five years the real estate market has risen dramatically and if you bought real estate you more than likely made money. This positive return for so many investors fueled the market higher as more people saw this and decided to also invest in real estate before they 'missed out'.

The psychology of any bubble market, whether we are talking about the stock market or the real estate market is known as 'herd mentality', where everyone follows the herd. This herd mentality is at the heart of any bubble and it has happened numerous times in the past including during the US stock market bubble of the late 1990's, the Japanese real estate bubble of the 1980's, and even as far back as the US railroad bubble of the 1870's. The herd mentality had completely taken over the real estate market until recently.

The bubble continues to rise as long as there is a "greater fool" to buy at a higher price. As there are less and less "greater fools" available or willing to buy homes, the mania disappears. When the hysteria passes, the excessive inventory that was built during the boom time causes prices to plummet. This is true for all three of the historical bubbles mentioned above and many other historical examples. Also of importance to note is that when all three of these historical bubbles burst the US was thrown into recession.

With the changing in mindset related to the real estate market, investors and speculators are getting scared that they will be left holding real estate that will lose money. As a result, not only are they buying less real estate, but they are simultaneously selling their investment properties as well. This is producing huge numbers of homes available for sale on the market at the same time that record new home construction floods the market. These two increasing supply forces, the increasing supply of existing homes for sale coupled with the increasing supply of new homes for sale will further exacerbate the problem and drive all real estate values down.

A recent survey showed that 7 out of 10 people think the real estate bubble will burst before April 2007. This change in the market psychology from 'must own real estate at any cost' to a healthy concern that real estate is overpriced is causing the end of the real estate market boom.

The aftershock of the bubble bursting will be enormous and it will affect the global economy tremendously. Billionaire investor George Soros has said that in 2007 the US will be in recession and I agree with him. I think we will be in a recession because as the real estate bubble bursts, jobs will be lost, Americans will no longer be able to cash out money from their homes, and the entire economy will slow down dramatically thus leading to recession.

Real Estate Investing – start with getting your own finances under control

Real estate has been a driving force in world economies since the days of Babylon, one of the most fantastic developments the world has ever known, and the desire to create, not destroy, is alive and well.

To enter the realm of real estate development requires vision, direction, and risk acceptance, but a knowledgeable investor will take calculated risks that are in line with his or her overall investment goals. There are only four empirically supported ways to delve into the real estate market: actually build, buy an existing development, invest in some one else’s development, or buy into a Real Estate Investment Trust. All of these venues carry risk and reward, but they also have distinctive differences that set them apart from one another. The most lucrative would be to develop a property from square one, but these types of investments carry more risk and work. To develop a project from scratch enables investors to have more autonomy, which permits them to more openly express their creativity.

Buying an existing property requires investors to pay a premium for the property because the initial risk of failure has already been taken by another developer. To buy into another developer’s idea is also laden with risk as well as reward. Developers provide the insight, while investors, provide needed equity. This is for those who have multiple commas in their bank account but have little desire, other than making more money, to enter the real estate market. These people are usually professionals who are too involved with their own profession to spend the time that is necessary to nurture a project from its conception all the way through its evolution.

Whatever gateway is used, real estate offers an escape from the groupthink that often imprisons many conventional investors. There are many ways to enter the real estate market, but there is one prerequisite to all of these: personal fiscal responsibility. Before people can make their mark in this discipline, they must commit to personal finance reform. By this, it is said that potential developers must start somewhere, and that place is their own finances, in order to create adequate equity that can be invested without jeopardizing their future. A potential investor must search out the pivotal facets of his or her personal financial life and make an honest assessment of his or her susceptibility to a certain level of risk. Real estate must coincide with your long-term aspirations.

Developers therefore must incorporate the needs of the external environment in which they operate and preserve what little there is left by not misappropriating one of our most precious resources by releasing it to those who wish to impede sustainable development by promoting their delusions of grandeur. If not, the next major development will have to happen on Mars, and to be quite honest, the ambience there is not so bright.

Monte Carlo Bright Lights Attract UK Property Buyers

A James Bond lifestye in Monte Carlo attracted the new rich Russians a decade ago, but a decade later it's the British - using conventional banking methods and with it a degree of respectability - who are investing in Europe's top tax haven.

While the British have been players in the region for nearly two hundred years, with Nice just along the coast being a favourite resort of the genteel Victorian English - in recent years the British have held a presence in Monaco, but now they're back in numbers not seen for over a century.

The new wave of British buyers is welcomed by Monaco real estate agents as their funds are more likely to be legitimately earned, while some of the 90's Russian cash was often a little suspect.

'Things have changed since the 90's when the Russian mafia were the big players in town', explains a Monte Carlo property agency, 'Then it was easy to put a few million cash down for a property and not have questions asked. In the last few years the banks have really tightened up due to government pressure because of the 'war on terror' and tracking money from illegitimate sources. Estate agents in Monaco know that the chances of a British buyer being able to show the source of their money as legitimate is very high'.

With quite ordinary one bedroom apartments at just under a million Euros, and a typical three bedroom apartment at over three million Euros, property prices have more than doubled in Monaco in the last ten years.

In the past Monaco property buyers have often been retired sixty-somethings, staying away from their home country to avoid the taxes that come with selling their business. But today's Monaco buyer is just as likely to be in his mid thirties or forties as they are in their sixties, with the middle age British leading the way.

'A few years ago around one in ten enquiries we were receiving were from the UK', the agency continue, 'but now it's virtually four in ten - a significant shift in the nationality of Monte Carlo property buyers.

The buyers have often made their money from one of three sources. The traditional company owner with a bricks and mortar business who has sold up, but also younger entrepreneurs, some of whom have made money in e-commerce. A significant number of buyers from the UK have worked in the financial sector, invariably in the City of London. We see a lot of futures and commodity brokers who are on high million pound and more salaries with annual bonues to match.

Some British buyers continue to trade or run their businesses from Monaco. Nice Airport is a ten minute helicopter ride away, and the City of London can be just three hours away from their Monaco property with the right connections. With some clever accounting thrown in, today's technology enables people to manage their UK business from Monaco in a tax free environment'.

Hotel de Paris

A loca Monaco travel guide Your Monaco.com has also noticed more Brits on the streets of Monte Carlo.

'The British have arrived in Monaco in numbers recently. The ones I have spoken to have recently sold their business or are on very high salaries with million pound and more annual bonuses. I would like to think they are coming here for the Monaco weather, but of course it is for the tax environment we offer -and of course the Monaco Grand Prix.'

In recent years the British economy has consistently been one of the strongest in Europe, and with a top rate of income tax cut a decade ago to forty per cent the wealthy have become wealthier - and want to stay that way.

'Despite the top rate of tax coming down to forty per cent, by the time other direct taxes such as National Insurance are taken into account around half of top earners salaries are - as many of the Monaco property buyers from Britain see it - being lost to the Inland Revenue. By moving to Monaco they effectively double their disposable income.

When you go to hotels in Monaco and see a couple with estate agent details on the table and a map of Monte Carlo with various places highlighted, there's an almost even chance that they will be British. A lot more than just a couple of years ago. They like Monaco, the security, the tax advantages and the closeness to London'.

By: Robert Palmer