The Case For Falling Real Estate Prices

Prices are rising! Buy now, while prices and rates are low! To listen to the talking

heads and to read the papers, one would think that real estate prices are in the basement and have nowhere to go but up. To those of us who knew a residential real estate bubble was coming at least five years ago, these promises ring hollow.

While there are some encouraging indicators in the general economy, the important ones for real estate include:

High unemployment and continued high job losses (how will people pay for a house)

Rising foreclosures and who knows how many bad loans being held by banks that are trying to protect their balance sheets (more supply of properties leads to lower demand)

Interest rates have nowhere to go but up. The Feds may be successful in keeping them low for awhile longer, but they must go up. When that happens, payments for individuals go up and houses become less affordable.

Although a lot of the big banks got bailed out, community banks are suffering -- mainly because of commercial loans gone bad.

Regardless of what some of the experts say, the government efforts to stimulate housing demand with tax credits and easy money for the banks have failed. There was rampant fraud in the programs, and most of the buyers would have purchased a house soon enough anyway. So, what do we do for the next couple of years?

The government has way too much debt and cannot keep creating artificial demand for much longer.

The government is creating laws that will hamper demand. For instance, HUD is trying to make it more difficult to sell properties using owner financing. Creating areal estate note has been one legitimate way for sellers to sell their properties to buyers who could not get a bank loan. The seller can then sell the real estate note to a willing mortgage note buyer.

Many states and municipalities have financial problems worse than the feds. They cant print their own money and may be unwilling to cut spending. So, their preferred alternative will be to raise taxes, further pulling capital out of the marketplace.

In the view of some of us, prices are going to be relatively stable in some markets and will continue to drop in others. Banks will not be able to fill all or even most of the need for credit, so mortgage notes and deed of trust notes will fill part of the void in the real estate market.

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by: John Hill

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