If you are an investor in US real estate then there are tough times ahead.
Prices have become vastly inflated in historical terms and values look set to plunge.
Here we will look at the reasons why and what you can o to protect yourself.
In the last 7 years the total value of real estate in the USA has increased in value by in excess of $11 trillion.
This has occurred in period wage stagnation and a period that has seen no real increase in personal wealth.
So how did it occur and why is the situation now so dangerous?
The Fed aggressively cut interest rates and this in combination with lenient lending policies of financial institutions.
This encouraged people to overt stretch themselves financially and borrow money on the basis that they can always sell at a profit.
Of course, as with all speculative bubbles, when price rises become detached from the fundamental economic reality prices are set to come down.
Just like people thought the tech stock bubble would never end they cant see the end of the real estate bubble but the signs are already there for all to see that the big gains are over:
In 2006 existing home sales declined by 8.4% which was the biggest drop in 17 years.
In addition new homes sales fell by 17.3%, the largest fall in 16 years.
2007 will see these figures get worse
This year, an estimated $1 trillion of Adjustable Rate Mortgages ARM's are due to have their monthly mortgage payments increased.
In 2006 the figure was just $300 billion.
This caused enormous problems for over leveraged homeowners.
As the number this year is greater, expect huge numbers of defaults and people losing their homes.
With prices falling and investors over leveraged, prices will fall, but what will turn that into a crash?
The answer is just as greed drove prices higher, fear will now drive them lower.
By examining the value of housing using indicators like:
1. Price-to-income
2. Price-to-rent ratios
We can see the gains are not down to economic fundamentals but driven by greed.
As with any speculative bubbles they burst.
We have a vast number of investors who have borrowed to much, who cant sell at a profit and rents don't cover their interest rate payments.
Prices are coming down, how hard they fall is open to debate, but this is a classic speculative bubble where people have over leveraged on the basis they can always sell out a profit.
So how can you protect yourself if you are involved in investment property?
There are institutions that are prepared for a small annual premium, to lock in property prices at a set value. Once the premium is paid, the value is set and that is the minimum the investor can sell his property for.
So they lock in a set price and have protection on the downside and if they make profits the gain is theirs.
These companies were not doing much business until recently, but they look set to do huge amounts now as investors flock to lock in the value of their property and gain peace of mind.
