THE HOUSING BUBBLE
Introduction:
In a post I made at another site, my comments on the "housing bubble" were challenged by a responder. Later, the same responder claimed my posting was "unacceptable." Upon reviewing the Email in his profile, I discovered he worked for the WILLIAM PITT real estate agency in Connecticut. It's clear his comments were motivated by his own self-interest in keeping the public unaware of the impending real estate crash. I urge readers not to do busines with WILLIAM PITT real estate, since they employ such devious techniques. Attempts to put a "spin" on public information should not be rewarded with our patronage. We shouldn't reward those who cruise the blogoshere, trying to counter any posts that do not further their own special interests.
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Housing prices have increased by an artificial increase in demand caused by reduction in interest rates. Less money spent on financing allows more money to be spent on the home value itself. Add to this the further increase in demand created by home speculation, as well as the decrease in supply created by such speculation. A San Diego real estate executive states that 3/4 of all homes sold in San Diego are to home speculators. Here is the link for that article:
http://news.yahoo.com/news?tmpl=story&u=/sddt/20050505/lo_sddt/majorityofcaliforniansmakelesstha nhalftheincomenee
All of this causes an artificial alteration of supply & demand forces. It's artificial in that speculators cannot continue to buy up homes, unless they find someone to sell them to. In other words, they can't continue contributing to this housing DEMAND increase, without reselling their homes to someone. (They can't continue to increase their "inventory" or "warehouse supply" of homes. Ultimately, goods in a warehouse must be sold. Surplus inventories don't create profits. Sales do.)
Ultimately homes must be sold to residential homebuyers, many of whom can't afford homes now. (In California, only 17% of families can afford a median-priced home.) Considering that inflation adjusted-wages declined 1% from April 2004 to April 2005, consumers' ability to buy homes is tenuous. Though mortgage rates have not increased since the Fed started increasing rates, eventually rates WILL increase. This will make homes even less affordable to residential buyers.
Foreign purchase of long-term treasuries is waning. This will result in a necessary increase in long-term interest rates, in order to attract purchase of our increasing national debt. When the long-term rate does increase, financial experts believe mortgage rates will also increase. This will cause a decline in money sellers receive for their homes, because financing charges will use up a larger amount of the buyer's money. This will reduce home equity assessment.
When speculators become aware of this impending decline in home equity growth, many will put their homes on the market. This will increase the SUPPLY of homes on the market, driving prices downward. Furthermore, speculators won't be able to buy as many homes, because interest rate increases make them more costly. In addition, the resultant decrease in home equity values will decrease the "equity" speculators can borrow off of, since many "investment" homes are purchased with home equity loans (from previously-owned homes of the speculators). In other words, speculation money will decrease. This, along with the previously-mentioned decrease in "residential" buyer demand, will further decrease prices.
Thus, market forces will eventually slow the rate of increase in real estate prices. Prices may even decline. The supply will increase, due to more homes being put up for sale.( New home construction may decrease, but probably not until market changes becomes obvious.) Demand will decrease due to decreased affordability & decreased speculation.
Again, all these factors will cause a decline in home price increases eventually. When this will happen, and how rapid the change will be, is uncertain. Maybe a better way to state this uncertainty is: Will the "bubble" slowly deflate, or suddenly burst? No one knows at present.
unlawflcombatnt
EconomicPopulistCommentary
http://www.unlawflcombatnt.blogspot.com/_____
Investment does NOT create jobs. It only "allows" for their creation. Increased Demand for goods creates jobs, because it necessitates hiring of workers to produce more goods. Investment "permits" job growth. Demand necessitates it.
Building a factory does NOT create jobs. Demand for production DOES create jobs. Goods are not produced if there is no demand for them. Without demand for goods, there is no demand for workers to produce them. Without demand, no amount of investment creates jobs.