With the latest national association of realtors report being less than spectacular (median home price down 14%), and the economy starting to show signs that a bottom may be nearing in the later part of 2009, will real estate actually start appreciating in the near future? Probably not!
The drops in Real Estate have been un-matched since the Great Depression, and
foreclosures are at all time highs historically. Real Estate sales have picked up, and inventories are starting to move a little better, but what does this really mean for the #1 investment of most Americans?
It may easily be 10 years or more until we see Real Estate appreciate from its Highs!
First of all, prices are still dropping, and remember if you think this is crazy, many people thought it would have been crazy to say back in the late nineties that the stock market will be no higher in 10 years from now.
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Here is why it will take so long for Real Estate prices to appreciate again.
Sluggish Economy. With unemployment still rising and people concerned about their jobs, it will be years before a lot of people feel comfortable with a huge purchase. People’s confidence has been shaken for a while, and their view of homeownership will become more in line with financial realities. Make sure you check out our
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Higher Interest Rates. This is what will really keep the Real Estate prices suppressed for years, even years after the market hits bottom. As the Government continues to provide stimulus and print money, which is certain to lead to heavy inflation, interest rates will rise.
As rates rise and 30 year mortgages (rates) moves higher, even with the solid demand for real estate, prices will stagnate due to the affordability issues that go along with higher rates.
A jump in mortgage rates of 2 1/2 % will increase the payments in a $200,000.00 mortgage by over 30%. We may easily see a 10% interest rate on the 30 year mortgage 5 years from now, which would increase payments on a $200,000.00 mortgage by over 60%.
With more heavily regulated lending standards, higher rates will make real estate less affordable and therefore keeping prices level.
We go through the relationship of interest rates and investments in more detail in our
investment course.
This was a Big Bubble. It still amazes me the run up in prices that we saw in just a short 5 year period, in an economy that may have seemed OK on the surface, but was in really poor health when you popped the hood! There were many big US Cities that increased in value over 150% in just about a 5 year period.
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