Will
the Bubble Burst Right After I Buy?
Probably Not for a While...
Robert
Irwin
Mr. Irwin
has more than 25 years' experience as a Los Angeles-area real-estate broker.
He is the author of more than two dozen books about real estate and is
recognized as one of the most knowledgeable writers in the real-estate
field. Mr. Irwin's most recent book is "Tips and Traps When Renovating
Your Home," (McGraw-Hill, 2000).
There is
an old rule that says, "That which goes up must also come down."
It probably holds for most things, including real estate. So the real
question, of course, is when will this happen?
While I don't
have a crystal ball, my guess is that the real-estate market is going
to keep rolling along as it recently has -- at least for a while. Right
now the big increase in home prices around the country is being fed by
at least four different sources:
Low
interest rates: More people than ever can afford the financing to
buy homes. With interest rates below 7%, there is a huge pool of potential
borrowers/buyers out there. This pool will remain unless rates go up.
Even then, rates would probably have to exceed 9% before they would
exert a strong cooling influence on the market.
New
types of financing: As recently as three to five years ago, buyers
typically needed to make a 10% down payment to purchase most homes.
But today buyers with good credit histories can put almost nothing down.
Some loans will even cover a portion of the closing costs!
Housing
shortage: In spite of what economists have been saying, there is
a shortage of good housing stock in many areas of the country. This
can be seen in the inventory of unsold homes, which is nearing an all-time
low. In some areas there is only a 30- to 45-day supply. The simultaneous
increase in home prices and apartment rents is more proof of this fact.
If there were a housing balance, apartment rates would fall as housing
sales rose (with apartment dwellers moving to homes, leaving an oversupply
of rental units).
Lack
of alternative investments: Investors aren't stupid. You can make
money today investing in real estate. Can the same be said for stocks
or bonds? Money stuck in savings accounts and certificates of deposit
earns a pitiful return, too, leaving investors with few good options.
Of course
there are wild cards. Another terrorist attack in the U.S. could have
widespread and unforeseen economic consequences. The meltdown of the U.S.
dollar could cause a world-wide recession. War in the Middle East or Asia
could have strong repercussions. And something totally unexpected could
jump out of left field. But unlike investing elsewhere, you can usually
either live in or rent out your real-estate investment.
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