why the housing bubble will burst
05-11-2006, 02:23 PM
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why the housing bubble will burst
Why the bubble will burst
1) Higher Interest Rates : As Interest rates rise, home owners who are already deep in debt are going to find it even more difficult to pay higher monthly payments. Most sectors of the economy are not growing, leading to falling wages and increasing costs of education, healthcare and rising prices. Squeezed between falling wages and rising interest rates, may owners will walk away from their homes. In the absence of higher incomes, home prices will have to fall, inorder to accomodate the rise in interest rates.
2) Record levels of debt : The nation and the individuals carry a mountain of debt, in the form of deficits and low savings rates. Hence most of the home purchases are being made due to easy credit. When the interest rates increase, the foreclosures are bound to increase and this is going to be a quick downward spiral.
3) Low savings rate : Home buyers are mortgaged to the hilt. The US Savings rate is currently at 0.2% and is at the lowest in many decades. A significant portion of these homes have been purchased on credit. Further, many buyers have sought loans even to pay the down payment. If the interest rates were to rise, it would be difficult for many home owners to keep up with the rise in payments.
4) Poor economy : Enough said. Between the rising trade deficit, the budget deficit and the loss of jobs, we have seen the number of jobless rise over the past five years. Further any decrease in number of unemployment benefit claims is not due to people finding work, but due to their giving up hope and stop looking for work altogether.
5) Rental rates vs House prices : If there were really a shortage of housing, then we should be seeing a shortage of rental properties. Rental rates should be increasing and the rental vacancies must go down. However, the rental vacancy rate is currently at 10%, the highest since the Census Bureau started tracking the data in the 50's.
6) Record unemployment : While statistics have you believe that the number of workers seeking unemployment benefits is dropping, that is happening due to workers losing their eligiblity to draw down further unemployment benefits. With several millions of jobs transferred overseas and several hundreds of thousands of jobs permanently lost after the dot com bust, it is almost impossible for the employment situation to be what it was, a few years ago.
7) Subprime lending : Banks and financial institutions are more than happy to dole out loans, without regard to the repayment capabilities or credit status of the borrower. Zero down loans, 125% loans, Interest only loans, ARMs and other financing schemes are now at their historical highs and many borrowers are going to be squeezed as the interest rates rise and the payment comes due. This will ultimately affect not only the borrowers and their communities, but the ripple effects will be felt throughout the society.
8) Boomers entering retirement : The baby boomer generation has begun retiring. With outsourcing, weak job prospects and insufficient income from social security, they will be forced to cash in, what constitutes the only asset for most - their house. While boomers who cash in early on may be able to get a good price, other sellers may end up listing their houses during periods of surplus inventory, thereby further dragging down house prices tremendously.
9) Changes to bankcruptcy laws : The recent changes in bankruptcy laws will make it very difficult for those with credit problems to retain their homes. As a result, bank reposessions will rise and these foreclosures will flood the markets, thereby lowering prices drastically.
read more here http://housingbubble.blogspot.com/20...to-bubble.html
1) Higher Interest Rates : As Interest rates rise, home owners who are already deep in debt are going to find it even more difficult to pay higher monthly payments. Most sectors of the economy are not growing, leading to falling wages and increasing costs of education, healthcare and rising prices. Squeezed between falling wages and rising interest rates, may owners will walk away from their homes. In the absence of higher incomes, home prices will have to fall, inorder to accomodate the rise in interest rates.
2) Record levels of debt : The nation and the individuals carry a mountain of debt, in the form of deficits and low savings rates. Hence most of the home purchases are being made due to easy credit. When the interest rates increase, the foreclosures are bound to increase and this is going to be a quick downward spiral.
3) Low savings rate : Home buyers are mortgaged to the hilt. The US Savings rate is currently at 0.2% and is at the lowest in many decades. A significant portion of these homes have been purchased on credit. Further, many buyers have sought loans even to pay the down payment. If the interest rates were to rise, it would be difficult for many home owners to keep up with the rise in payments.
4) Poor economy : Enough said. Between the rising trade deficit, the budget deficit and the loss of jobs, we have seen the number of jobless rise over the past five years. Further any decrease in number of unemployment benefit claims is not due to people finding work, but due to their giving up hope and stop looking for work altogether.
5) Rental rates vs House prices : If there were really a shortage of housing, then we should be seeing a shortage of rental properties. Rental rates should be increasing and the rental vacancies must go down. However, the rental vacancy rate is currently at 10%, the highest since the Census Bureau started tracking the data in the 50's.
6) Record unemployment : While statistics have you believe that the number of workers seeking unemployment benefits is dropping, that is happening due to workers losing their eligiblity to draw down further unemployment benefits. With several millions of jobs transferred overseas and several hundreds of thousands of jobs permanently lost after the dot com bust, it is almost impossible for the employment situation to be what it was, a few years ago.
7) Subprime lending : Banks and financial institutions are more than happy to dole out loans, without regard to the repayment capabilities or credit status of the borrower. Zero down loans, 125% loans, Interest only loans, ARMs and other financing schemes are now at their historical highs and many borrowers are going to be squeezed as the interest rates rise and the payment comes due. This will ultimately affect not only the borrowers and their communities, but the ripple effects will be felt throughout the society.
8) Boomers entering retirement : The baby boomer generation has begun retiring. With outsourcing, weak job prospects and insufficient income from social security, they will be forced to cash in, what constitutes the only asset for most - their house. While boomers who cash in early on may be able to get a good price, other sellers may end up listing their houses during periods of surplus inventory, thereby further dragging down house prices tremendously.
9) Changes to bankcruptcy laws : The recent changes in bankruptcy laws will make it very difficult for those with credit problems to retain their homes. As a result, bank reposessions will rise and these foreclosures will flood the markets, thereby lowering prices drastically.
read more here http://housingbubble.blogspot.com/20...to-bubble.html
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