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The Real Estate Market Has Crashed! The Bubble Has Burst! What's Next?

Aug 17, 2007
I was watching a market report station on TV. The headline for the upcoming real estate news segment was, the real estate market has crashed! The bubble has burst! What's next?

What had these people in such a tizzy? The reporter stated, "housing starts are down, way down. Only a year ago, housing starts were over 1.8 million. Now, the latest number is hovering around 1.4 million and the forecasters are looking for the drop to continue, precipitously for another 11/2 to 2 years."

Well, I guess this reporter may have a point. Though you may think forecasts don't always hold too much water, it is hard to argue with a 25% downturn, and 25% is what housing starts are down over the last year. One would have to conclude the evidence is clear, the real estate market has crashed; the bubble has burst!

What are housing starts and what do they mean to the economy?

Basically, the term "housing start" is used when the permits to build a house are in place. In other words, the project of building a house has started.

When the economy is strong, more houses are being built in order to fill the need that is created when people are looking to buy new houses. A strong housing start number means people are able and willing to spend money on real estate.

A strong housing start number also means the banking industry is sound because they have enough money to lend people to buy these houses. It also means interest rates are reasonable because if borrowing money were expensive, as it is when interest rates are high, few people would qualify for mortgages.

Of course, housing start numbers can't always be up. Housing start numbers start to slide when:

Interest rates go up. This makes the effective price of a house higher and takes the house out of the affordable range of many potential buyers. And/or

The unemployment rate goes up. If more people are unemployed fewer will be in the market to buy a home. Also, if more people fear they may become unemployed, a common sentiment when unemployment is high, these people will not commit to buying a house. And/or

Prices for building materials rise. This will drive the price of houses up to a point where it will cause them to become too expensive for a lot of potential buyers. And/or

Consumer sentiment is down. The general populace has the impression that something bad economically has happened, or is about to happen and therefore, not many people are comfortable investing their money in a high price item like a house.

Which of these things has happened this time?

Let's take a look at the economic numbers and see what has gone awry that would cause housing starts to plummet.

Interest rates? Interest rates are looking good right now. While they are not at an all time low, they are not very high either. Certainly, if interest rates went to 8% it could cause a slow down, but not a crash. Anyway, right now interest rates for a 30-year fixed mortgage are about 6.5 %. Not bad at all!

Unemployment? Actually, we haven't had a severe unemployment problem since the early 80's. At this time the unemployment rate is 4.5%. Historically speaking this is a very good number. We've been fortunate, the unemployment rate hasn't been over 6% since 1994 and during the last 13 years, 4.5% falls in the lower middle part of the range.

Building material prices? The price of copper and lumber are high, but these prices haven't shot up all of a sudden. In fact, they've been stable over the last few years.

Consumer Sentiment? No problem here. Consumer sentiment is at 90.5. This is a very good number for consumer sentiment.

Then, what's wrong?

It looks like there is no real clear reason the housing starts number took a hit last month, we'll just have to wait, but consider this; the previous month's 1.8 million was phenomenal, but the 1.4 million it dropped to, isn't bad either.

So, let's hang on. All this "crash" has given us so far is a dynamic headline. Could it be foreclosures are up due to the large amounts of negative amortization mortgages that lenders have sold in the past several years and this is putting a drag on the housing sector? Maybe.

Could it be builders perceive the "guest worker program" bill going down to defeat in congress will be a problem? After all, many construction companies have made a lot of money over the past several years on the backs of illegal immigrants. Without them, these companies would have to charge more for their finished product and they may feel there will not be a market for these higher priced houses.

It is kind of funny how housing starts fell just as momentum was building in the "grass roots" to deport all the illegals. Maybe, there's something to that. Then again, maybe it's all just much ado about nothing.
About the Author
Ed Lathrop is a successful Real Estate investor. He has developed EzCalculator, a Mortgage Calculator that calculates anything to do with mortgages, shows you how to pay off credit card debt and now includes a free student loan calculator. This Free Mortgage Calculator, is home to the famous "How to Make $100,000 on Your Mortgage" calculator. Come visit this free site at Mortgage Calculator!
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