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Let's look at this in more detail.
1. Prices are historically too high
House prices are far in excess of any historically known relationship to rents or salaries.
Salaries on the whole cannot cover mortgages except in the short term, by the use of adjustable interest-only loans.
2. Interest rates.
Interest rates have risen over the last few years and are likely to rise further.
If this happens, house prices must therefore drop as liquidity is squeezed from the economy and money is more expensive to borrow.
3. Many recent loans are adjustable, not fixed rate.
As more adjustable rate mortgages (ARMs) get adjusted upward upwards and the figure is in excess of 3 trillion the more home owners will be squeezed
Even, if the Fed were to keep rates on hold, all above will go up anyway, which has the same affect as an
interest rate rise.
4. First-time buyers.
First time buyers are simply being squeezed out the market by high prices and interest rates.
5. Speculators.
Around a quarter of houses bought in 2005 were speculative purchases and a high number since.
These are pure investment properties and are not to live in.
As with any speculative bubble it bursts as the housing market slows and prices fall these speculators face huge losses.
6. Empty housing.
Builders are being forced to drop prices faster than owners. They have been in on the speculation and have overbuilt and have excess inventory that they cannot sell unless they drop prices.
7. Restriction of credit
As interest rates go up risky loans, get riskier and credit gets harder to get.
The total money available for buying houses in the economy falls as lenders become more risk averse.
The above is common sense.
When money becomes more expensive liquidity in the economy drops and the first thing that happens is house prices are hit.
Even if rates don't go up low cost starter mortgages will and this is the equivalent of a rate hike to many home owners.
How can you protect yourself and make profits.
If you are investing in property then there some courses of action open to you and you can make a profit even when prices fall.
1. Keep to prime locations with firm demand.
Don't speculate go for safe options, that historically have held their value.
2. Renovate
If you upgrade properties the increase in value will be far more than the renovations thus helping you increase the value above the cost
3. Diversify overseas
There are many booming overseas economies so consider swapping to these booming locations.
For example, property in Central America is cheaper and the growth potential for more than in the US for investment property.
4. Take advantage of this!
You can get schemes that protect your property value and make sure that even if prices fall, you do not lose.
This gives peace of mind that you lock in a price and gives peace of mind that some protection is in place if the market falls.
Amounts paid for this type of protection are reasonable and more investors than ever are taking advantage in uncertain times.
If you have the above in place and renovate wisely you can still make great profits.
Finally
As with all historical bubbles speculators will lose eventually as greed pushes prices to far from realistic values.
This bubble is no different, however take the right actions and you can not only weather the storm but possibly make some good profits to.
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