US Real Estate Prices - a Bear Market About to Crash?

By: Sacha Tarkovsky

The US real estate market is already in trouble and things are only going to get worse and cause misery for millions as this classic speculative bubble is set to burst.

Let's look at the forces at work and action you can take to protect yourself.

The background

In the last 7 years the total value of real estate in the US has increased by a whopping $11 trillion. This has occurred despite nationwide wage stagnation and declines in real wealth.

So what drove this increase in value?

Low interest rates and reckless lending policies are responsible and people eager to borrow beyond their
means, now this equation has set in motion the start of what will be huge falls in US House prices.

The storm clouds are gathering:

In 2006 existing home sales declined by 8.4%, the biggest drop in 17 years, and new homes sales fell by
17.3%, the largest in 16 years'.

Interest rates may not rise but many people are about to get the equivalent of one this year:

This year, an estimated $1 trillion of ARMs (Adjustable Rate Mortgages) are due to 'reset' which will cause increases in monthly mortgage payments.

We are guaranteed to see a steady rise in defaults as well as a huge number of new claims for personal bankruptcy.

This downward cycle is just starting.

In 2006, just $300 billion in ARMs reset pushing over leveraged homeowners to the brink of insolvency, and this year we have triple that.

As more people are unable to hang on and their homes go into foreclosure; inventory will continue to rise and cause a glut of vacant property.

The Bullish argument

Housing bulls dismiss the above and point to:

1. Rising immigration,

2. Building restrictions,

3. Baby Boomer demand for second homes

But examining the value of housing using sensible value indicators like:

1. Price-to-income

2. Price-to-rent ratios

Suggest the gains in the bubble areas can't be explained by economic fundamentals but by sheer greed.
People have seen their friends make money in real estate and also see it as an easy way to riches, so they get on board and are mortgaged up to the hilt.

As with all speculative bubbles they burst.

Most purchasing decisions have been done not on underlying value, but on what they think they can sell a property for in the future. This by very definition is a speculative bubble and its about to burst big time.

How can you protect yourself?

There are many schemes that will help you protect the value of your home.

They offer to lock in your house value at a set value for a small fee.

This means that your house has a set value it cannot fall below, but your gains if the housing market rises are unaffected.

These schemes were doing very little business a year ago but business looks set to boom now as more home owners see the reality that lies ahead.


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