Real estate refers to immovable property such as land as well as any physical structures attached to land like houses, buildings or commercial establishments. For centuries land has been considered as the primary measure of wealth and even today developed countries that are rich in real estate in real estate attract foreign investors to spur economic growth. U.S real estate market too is considered as a backbone of its developed economy but since last few years it is witnessing a downturn due to some reasons. It is said that the housing bubble in U.S will soon come to an end. A bubble is something where the prices are being regulated by speculators and not the real end consumers and if it is being fueled by the real consumers then it can be called a pure play of demand and supply. The reasons for the downturn in real estate market can be justified as follows:
1)Rising property prices: - Since last few years there has been a sky-high rise in prices of property in majority of the states of U.S. this has reduced the number of buyers in the market. A rise in mass property causes a downfall and obstructs economic growth of any economy. Again the money market plays a major role in giving rise to the prices of commodities, assets, buildings and the materials used in construction. On the other hand population is increasing which increases the demand of houses which is a basic need of shelter of any individual.
2)Inflation: - Inflation is a world recognized evil that is observed throughout the globe. It leads to an increase in most essential goods to the goods of sheer luxury. It affects the most common man and reduces his standard of living and as a result owning a house for a layman becomes a mere dream.
3)Increase in interest rates: - Interest rates on loans and mortgages have always driven the real estate market. As the rates go up the market takes a slow landing and as the rates fall the market goes up. But since last few years' rates have been steadily rising at ¼% every three months because the Federal Reserve has adopted a policy to increase the rates. Hence people overextend themselves to buy the house at adjustable loans with adjustable payments. The increase in adjustable rates will further send the consumers in monthly payments hundreds of dollars higher and cause many more for closure homes to enter already saturated market.
4)Default on payments and bankruptcy: - According to Indy Mac bank of California which is the 7th largest mortgage originator in U.S up to 4% of homeowners might lose their home in 2007 due to default in payment of interest which is a result of job lay offs and zero level of savings. That is four times the average rate of borrowers who normally default on their loan. This leads to a drastic downfall in the real estate market.
5)Sub prime loan- the root of all evil: - Sub prime loans are the loans granted to people whose credit is less than desired. From 1994 to 2003 sub prime mortgage lending grew up at an annual rate of 25% up tenfold in 9 years. As of September 2006 80% of all sub prime mortgages were optioned ARM which tend to have huge payment ultimately resulting in increase in for closure rates.
The worst part of losing or selling houses at the bottom of the market is not the money that is lost or the pain that is suffered but that the investor is completely thrown out of the real estate market when the market starts to boom again which it certainly will after a point of time.
