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.

In conclusion, the three reasons the real estate bubble is bursting are higher interest rates; first-time buyers being priced out of the market; and the psychology about the real estate market is changing. The recently published eBook “How To Prosper In The Changing Real Estate Market. Protect Yourself From The Bubble Now!” discusses these items in more detail.

How Gurgaon’s Real Estate Can Gain From Their Budget in 2017

Gurgaon – a big player in India’s real estate sector – has been grappling with difficult times especially since 2015, and in 2016 the sales volumes for properties in Gurgaon further went down and new unit launches were limited in the city.

Further, demonetization during the end of 2016 further affected developers in Gurgaon like in the rest of the country. There was stability noticed in quoted prices and discounts were still available, but people stayed away from buying residential flats in Gurgaon. Gurgaon saw a fall in investment in the residential properties as residential buyers, much of whom were primary end users were on the lookout for ready-to-move-in flats and were wary of promises of future infrastructure or property. Overall, Gurgaon’s market saw a great dip recently.

With the new budget placing affordable housing under the category of infrastructure, the government plans to get closer to its goal of providing affordable housing for all by 2022. This newly-granted infrastructure status also makes available cheaper funding options from real estate builders who can now access funds at a borrowing rate less than 10% for developing affordable housing, leading to a subsequent and definite reduction in purchase costs for homebuyers.

About 95% of the demand in the real estate sector has been of affordable housing. With reduced borrowing rates, the real estate developers can now focus on constructing housing projects where a major demand lies, and look forward to a healthy growth in this segment.

The budget has benefitted the end users the most. With enormous tax benefits offered to people in the lowest income bracket as a significant tool to push affordable housing, the dream of many to own a house now seems to get closer to realization. Also, with demonetization, banks have been further flooded with funds, and there are speculations that banks will low interests rates further and come out with affordable and attractive home loans. Future homebuyers have been watching the market carefully.

As a real estate market, Gurgaon has great chances of recovering from the downtime in the recent past. One of its driving strengths has been its ability to churn out high-quality office spaces, and now while building on this strength, if developers in Gurgaon prioritize constructing and launching ready-to-move-in affordable housing projects that end-consumers place high value on and subsequently reward, then Gurgaon will soon rise up as a strong real estate provider meeting the housing needs of its residents.

What to Do When You’re Turned Down For Your Commercial Real Estate Or Development Loan

What alternatives do you have when you are turned down for your commercial real estate loan by your bank or other lender? Your property has an appraised value, and you have equity in it that you’d like to cash in, or you’re trying to buy a new property and can’t get a lender to give you the purchase money loan. Maybe you’re a real estate developer who is used to getting your loans approved because of a successful track record, and can’t even get a meeting now. Or maybe you’ve been approved for a loan, but can’t stomach the rates or terms.

We’ve all heard more than we’d ever want to know about the liquidity and credit crisis, but what may not be as obvious is that there is plenty of money out there–for the right deal. Change creates new opportunities, and when the traditional financial institutions can’t or won’t take on more risk, there are many lenders and investors who will. It’s all about taking another look at your existing assets, both in real estate and in liquid or paper assets, and making the best choice available. The following is a simple list of ways to create alternative financing possibilities:

  • 1 Which institutions have turned you down, and why? Knowing what has not worked can turn you in the right direction, so make sure to ask as many questions as possible when you’re turned down, including asking if they can direct you toward a lender who might be able to do your loan. While most of the following criteria usually play some role in qualifying for a loan, some lenders focus most on CLTV or LTV (combined loan-to-value or loan-to-value), some on DSCR (debt servicing coverage ratio), some on IRR (Internal Rate of Return), some on Cap Rate, some on credit, and some on the overall financial strength of the borrower. Knowing this is often the key to getting to the right lender.
  • 2 If your loan was approved but you didn’t like the rates and terms, see how much room there is for friendly negotiation, and don’t delay. It’s vital to keep on good terms with anyone willing to loan money these days–don’t burn a bridge if you can help it. I personally know many developers with “sticker shock” who expected to return to the approving lender several weeks or even months later (after they shopped around and couldn’t find anything better, or were turned down by everyone else), only to be turned down this time because the lender starts to wonder if there’s something wrong with the project that they didn’t see the first time, or because conditions have changed.
  • 3 You may have to put more cash down if you’re making a purchase. Risk-averse lenders want a much more attractive LTV loan-to-value before they will step in with the rest of your purchase money funds. If you’re refinancing, remember that a risk-averse lender is very cautious about appreciated value and would rather see more of your own cash in the property.
  • 4 If you don’t have the additional cash, take stock of your other assets. There are lenders who will loan against many different types of assets such as merchant accounts, future cash flow, marketable securities, other financial instruments, cross-collateral real estate, insurance settlements, and factoring receivables. For certain types of projects, such as energy and green-type projects, as well as films, there are tax credits, carbon credits and various types of bonds and partnered participation sponsored by municipalities and states.
  • 5 When considering a purchase, or perhaps if you are designing a new project to build, you may want to look at which property types lenders are looking to finance before you make an offer. Even if you have talent, a niche, tons of experience, or a crystal ball that works, why swim against the current when you could go with the flow?
  • 6 If you’ve gone through all your regular banking relationships, you may want to consider working with a licensed broker. Although you pay for the broker’s services, remember that a broker is keeping up with many more lenders and investors than you generally could, and they can help steer you toward those whose guidelines you fit.
  • 7 One resource that can work well (if done with the right institution) is a leased financial instrument, such as a SBLC or a CD. Some larger real estate transactions can be closed either with this kind of credit enhancement, or with funds deposited in escrow when other funds will be available at closing. It’s also sometimes possible to run a useable line of credit against a certain type of leased instrument when the financial institutions on both ends agree to the terms. Be very careful to have approval from the bank providing the credit line prior to making any payment.

It’s important to be creative as well as realistic when trying to get a commercial real estate loan, and to be willing to accept the changing financial terrain while being open to new suggestions. Look for solid professional advice to improve your own personal and professional goals. Sometimes when you look at things differently, the solutions to the problem become much clearer and perhaps better than the plan you first had.

Colleen Zaruba copyright 2009