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The Bubble Effect
Turn on the TV at almost any time day or night and you will find news and talk shows informing us that there is a Real Estate bubble. What is a "bubble" and how do they know? The simple principle of what goes up must come down is being applied in general thought now and many in the public are starting to buy it. Let's sit down, think logically and see if there is indeed a bubble or if there is room to grow.
Challenge 1: The "Investors" are driving the market upward and when they leave, everything will crash.
This of course is completely false. Let's start by looking at home loans 5-10 years ago. A person with a decent credit score would have to pass a bunch of hurdles and put down 5-10%. On a $200,000 homes, this meant coming up with $10,000 - $20,000. The Internet was around, but still a mystery to most. Fast forward to today. The Internet is widely used by everyone from the grade school child to the senior citizen. The flow of information is simply amazing and because of this people are being educated quickly. People are no longer limited to just those they personally know. Loans are now easier to get. Someone with decent credit can walk into a home with zero down now.
How many people do you know that pay rent on time? How many of those people have $10,000 or $20,000 or more in their account? Thanks to the recent relaxation of loan qualifications, these people were locked out of owning a home as recent as 5-10 years ago can now walk into a home and enjoy the American dream. You see, it is not solely investors driving the market (many are regular people), but the millions and millions of Americans who can now walk into a home with little to nothing down.
Challenge 2: Don't forget about the Tech market crash.
You can't go far without hearing some so-called expert performing a "remember the Alamo" yell about the tech stock crash years ago. Why is this not relevant? The first reason would be that you can live in a home and everyone needs somewhere to live. A stock is just a piece of paper that you can put in the shredder or in a drawer. If it goes to zero you have nothing. What if a home went to zero? You would still have it to live in and enjoy.
The tech market crashed because you had brick and mortar CEO's and personnel trying to run Internet based companies. You had people with no real knowledge of how to make money on the Internet coming up with all sorts of ridiculous ideas. It was destroyed because the majority of the people running the show were not properly qualified and the people investing did not care. To compare this crash with Real Estate is like comparing the Enron fiasco to why you burnt the tri-tip on your BBQ.
Challenge 3: Interest rates will go up and everything will crash.
Will it now? Rates have not jumped up overnight nor will there. Think about this. Let's say you are looking at a home that will require you carry a mortgage of $200,000. Right now you can get it at 6%, but you wait and tomorrow when you wake up, rates went up and it will now cost you 8% (which is a major jump). The difference? $250 per month. If you bought a home just $20,000 less, your mortgage difference would drop to only $100 per month more. This was a huge jump, but would $250 per month stop everyone from buying? Not even close. It would cause some to lower the amount of house they bought slightly. For most, they still buy.
There are more loans for people with bad credit and low incomes than ever before. These are not some wildly high percentage loans either. The ease of loan approval has created millions of buyers all over the country. I would submit to you that if homes in an area come down and correct a little, it is not because of a "bubble", rather because the homes were overpriced in that area to begin with and/or the area's value decreased. You can find out more about Real Estate by visiting my website, Jake Truman.com.
Copyright 2005 JakeTruman.com
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