Is The Bubble Bursting Now?
I have read two articles today regarding overpriced real estate and interest rates. The later is going to be raised to lower the former (did you understand that?)
The first was at DELETE and was an article with a June date (this month) refering to a current housing price bubble.
"Prices had already peaked in the country’s hottest markets, and now we’re seeing a mini-bubble forming right on that peak.
All this action is temporarily masking the cooling effect on prices caused by the increase in the cost of mortgage money. But make no mistake -- the effect is there. It won’t take long for the procrastinators to be absorbed, and then market forces will once again prevail.
"
The second was an article at DELETE regarding English house prices and interests rates. It is below:
Bank hits home with follow-on rate rise
By Anna Fifield, Economics Reporter
Published: June 11 2004 5:00 | Last Updated: June 11 2004 5:00
The Bank of England stepped up the pace of interest rate rises yesterday, increasing its main rate by a quarter-point to 4.5 per cent as it attempts to stop surging house prices and record personal borrowing from fuelling inflation.
By acting for the second month in a row, City economists said, the Bank's monetary policy committee was showing it had lost patience with consumers' unchecked spending.
"The MPC has sent its strongest signal yet that it wants to bring an end to the consumer and housing market booms," said Roger Bootle, chief economic adviser to Deloitte.
I was also talking with a local aquaintance that rents houses and he told me that the rental market is very soft because everyone has bought houses due to the low interest rates.
My take on this is that now is a difficult time to buy and rent. Therefore, the best thing to do at the moment is rehab. then sell. And watch out below because the prices could be falling when the interest rates rise. Any comments?????[ Edited by JohnLocke on Date 06/11/2004 ]
Moneygrabber,
This obviously has been thrown around a lot and for years. Five years ago when I worked in San Jose, my boss would not buy a house because he thought the bubble was going to burst. That was before http://www.the.com bust and before most properties in that area increased by 50% over the past 5 years.
I believe that the price of properties is going to correct itself. But does that mean that the price of properties is going to crash? Not in my opinion. There will probably lot's of people who cannot afford their ARMs when they go up, but that will be at least a year or two down the road and you always have people who want or need to rent. The rental market does seem to be soft right now. Wholesaling and not holding onto properties that do not produce positive cash flow is definitely better than buying and holding.
Anything you buy, I think you need to have a detailed exit strategy(s) in place so you know how much you can lose and still get out without losing your shirt. Long term, if you can hold onto properties in San Jose, I don't think you will have a problem, provided you can rent them for enough to cover your mortgages.
Just my opinion,
Robert
[addsig]
As to the perspective in the UK.
1. The UK has a history of booms and busts for house prices.
2. The rental market was almost nonexistent before 1996. Prior to that point lenders would not make NOO loans as the eviction process did not allow a lender to evict a sitting tenant in many cases
3. The last 'crash' in the UK was 1989-1994 period. Prices went down 30% in some areas. The interest rates high 15% (quickly dropping back to 12%) and unemployment peaked. The tax laws reducing mortgage interest deductions took place in 1989.
The UK market is more volatile then the US, uses mostly variable financing with little in the way of fix interest products beyond 2-3 years and has seen rapid growth over the last 5 years. Some years have been over 30% with most of the 5 years in the mid to high teens.
UK investor - residential
John
[addsig]
Both points above are well taken and very appropriate.
When the 1989 Bust in England comes to mind, I think of an Englishman who was sitting next to me on a plane for Spain. He was talking about how the problem was such that people were walking into the bank and leaving their house keys with bankers and leaving. This particular Englishman was moving to Spain where his father in law had a business which he was going to work in.
Must have been a real bust in England during that time.
Also, the exit strategy point is good. That keeps everything realistic. I can relate to exit strategies from my experience in the stock market. Without an exit strategy, you risk watching your dollars turn into dimes.
============
"It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress."
---Mark Twain
Interesting.
Let me give just an observation of the recent market in Bay Area.
I've been looking at the sales history of the luxury (or say expensive) homes that were purchased in year 2000. That was a time when people had "crazy" money and thought that they can afford to buy entire world. That was a time of multiple offers, just like it is now. Houses that went on the market for for 2mln were sold for 3-4mln.
What happened afterwards was that those buyers ( buyers of year 2000 ) sold their properties for less than they bought them for. They lost all the downpayments, and many even had to do a short sale. It is still happening, by the way. I look at current listings in my area and check every house on when was it sold last time. Year 2000 still goes below its purchase price.
Was it a bubble? Is it a bubble now?
I would also consider this:
1. 2 years from now - What should be a family income that they'd be able to afford 650,000 3bed/2bath, 45 years old house in so-so neighborhood with 20% downpayment and 9% interest?
2. Considering that in better neighborhoods with better schools houses go for more then 800,000, what should be the income?
Is it a bubble?