Another Real Estate market crash may soon be upon us...

     As the title of this post insinuates, I believe that we may be on the verge of another Real Estate market crash, despite the down market.  Our own fear or apprehension to participate in the market may end up being the cause.  Let me explain:

A brief history lesson
 
     Up until the mid 20th century, US Dollars were backed by commodities such as gold and silver and, therefore, had a finite supply.  Money could not be printed at will since it needed to be backed by these commodities which were finite.  The investors that withdrew all of their money from the stock market during the crash that caused the Great Depression were simply holding on to it rather than reinvesting and so the cash basically dried up.  The depression was caused by the fact that no money was being spent, and therefore, no money was made by the manufacturers to pay their employees.  Now, President Richard Nixon signed a bill in 1971 which ended the backing of US currency by gold and created a new system where the Dollar was backed by debt.  This is what causes the value of our currency to decline over time, also know as inflation.  This also means that there is no limit to the amount of money that the government may print in order to stimulate the economy or bail out banks or large car companies from their imminent demise, they may print at will. 

More recent history
 

     The stock market, as we all know, began to bubble in the 1990s due to the DOT COM craze.  It grew to it's largest point in history due to speculation in all these new companies and reached it's peak in and began to decline in March of 2000.  As a result of the declining market, many investors began pulling their money out which caused the market to fall even more and caused even more investors to exit the declining market. This mass hysteria caused the stock market to crash and lost many investors money that took their entire lives to save.

     As a result of the stock market crash, the government decided to lower interest rates in order to stimulate the economy and keep it afloat.  They had learned their lesson from the crash that caused the Great Depression back in the 1920s and 1930s when the problem wasn't the value of the US Dollar, it was the absence of the Dollar.  The lower interest rates caused many people that couldn't afford a home prior to this period in time to suddenly qualify and the buying began.  The banks, motivated to write as many new mortgages as possible, began allowing many very questionable buyers to qualify with interest only mortgages, adjustable rate mortgages and other loans with great starting terms, but unforseeable destructive terms later on, which is partly what caused the current recession.  Investors, seeing the feeding frenzy, began doing what they do best, taking advantage of the demand, and began buying up properties to flip.  With the motivation of buyers desperate to buy a home, demand was soaring and, therefore, prices soared.  When the bubble finally burst, many a homeowner found themselves upside down in a home worth half of what they had paid for it and an unmanagable mortgage payment.  Banks began to foreclose, prices dropped even further in response and we found ourselves in our current market situation.

The crystal ball

     Now, why do I believe that we are in for another crash?  Well, since the market is extremely slow right now, prices have stabalized and we are flooded with foreclosures that noone is buying, Real Estate investors are buying them all.  They can't resist the deep discounts that are available and the potential millions to be made from a population either too afriad to buy or waiting to buy because they think prices will fall further, and are therefore renting.  Now, as we discussed above, the government has flooded the economy with bailout dollars that didn't exist prior to the recent market crash and is currently in negotiations to raise the defecit ceiling to provide more money for the budget.  The resistance of the House of Representatives will cause the government to seek out other forms of funding, one of which will likely be income from raising interest rates.  When the interest rates bagin to climb, we who were waiting patiently for prices to fall further will make a mad dash to buy a home while they can still secure a 5 or 6 percent rate as the rate continues to climb.  Who will we be buying these homes from?  You guessed it, from the same investors that bought them all during the recession, who will now be setting the prices and creating a new bubble.  This bubble will inevitably burst causing another crash, quite possibly worse than the one that we're currently in.

      Will this new crash occur?  I believe it will, but I also believe that it can be prevented.  Participation in today's housing market will help to clear off the inventory of distressed property currently available and will help to stabalize the reeling economy.  Interest rates will likely still rise, investors will likely still sell, but the impact can be far less if buyers are already happy and secure in their deeply discounted property aquired through taking advantage of the current down market.


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