Housing BOOM Correction WHEN??

There is a huge debate about when the bubble in Real Estate will be over. It will TAKE a certain catalyst to make that happen. BUT all else being equal, the cost of money will do it. Money is cheap so everything else is rising, specifically the dollar. 8% Thirty Year mortgages is the argument... However i take it with a grain of salt as i feel that the next 5 years will reveal a great portion of homeowners using hybrid loans to do their financing. Over $2.5 trillion in "paper money"... the so-called wealth that has been created since 2001 by the rise in housing prices..

How important is 8%?

According to Greg McBride, a CFA at Bankrate.com, "Most economists and housing experts repeatedly cite 8% as the mortgage rate tipping point, one that could trigger a widespread drop in home prices. Rates are currently near 6%."

There's no getting around it, when interest rates rise... your buying power falls. And lowered buying power always leads to falling housing prices.

The Danger of "Reverse Leverage"

Imagine you buy a $400,000 home and put $20,000 down. If the value of your home rises 10%, you'll make $40,000 on a $20,000 investment...a triple!

But what if your house falls by 10%?

You then have a $380,000 mortgage on a $360,000 house. You've lost your entire $20,000 down payment... and you're another $20,000 in the hole.

One of the biggest concerns about the housing market is that new home construction is hitting record highs at the same time that new home sales have dropped close to 20-month lows. This means there is an oversupply of new homes and not enough people buying.

In January 2005, the inventory-to-sales ratio for new homes increased to 4.7 months... the highest level since 2000. The last time rising interest rates collided with a real estate oversupply was 1990. That year, the price of an average home fell around 10%... and the price of upscale homes declined by 40% to 50%.

HOW TO PROTECT YOURSELF. well You could sell, or you could find a REIT index and short it! Check with your broker. TAKE A LOOK AT THIS CHART. My analysis says we're headed for a stagnation of rates for a bit...

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