Goodbye Mr. Greenspan, Hello Higher Interest Rates

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On Greenspans’ Last Day the Fed Raises InterestnRates Again Greenspan gives the Real Estate Market one final shot by raising short term interest rates for the 14th straight increase since June 2004. Greenspan tried hard but failed to kill the real estate market. Fortunately Greenspan has been thwarted in his efforts to slow down the real estate housing market during the last several years. Are we in for a Real Estate Bubble or Real Estate Boom in the future?

The New York Times reported that on the last day of Alan Greenspan’s, career he gave the Real Estate Market one final shot by raising short term interest rates for the 14th straight increase since June 2004. He and the Federal Reserve board increased short-term interest rates another quarter point today, to 4.5 percent.

Greenspan tried hard but failed to kill the real estate market

Fortunately Greenspan has been thwarted in his efforts to slow down the real estate housing market during the last several years. Long term mortgage rates remain at historically moderately low levels of less that 6%. This compares favorably to the level of mortgage interest rates over 50 years ago.

Real Estate Bubble or Real Estate Boom?

Both average investors and professional real estate experts can’t seem to agree on the direction the real estate market will take in the future. Some warn of a Real Estate Bubble and others say there is no bubble and thus no problem. The truth is probably somewhere in the middle.

Real estate bubbles are Local not National

Real estate is always local by nature. Real estate bubbles are created by an imbalance in supply and demand, usually confined to a limited local area.

National Real Estate Bubbles are in fact very rare

The last, a national scale real estate bubble occurred over 60 years ago. This real estate bubble or crash as it was called back then, was caused when the government closed all the banks after the stock market crash of 1929 which ignited the Great Depression. After the banks closed many were discovered to be insolvent due to bad loans with poor collateral, usually real estate mortgages. These banks never reopened.

Closed Banks took their entire depositor’s savings

When a bank closed it wiped out the deposits and savings of thousands of depositors. In effect the entire nation ran out of cash because the people who had money in a closed bank couldn’t get back their own money and simply went broke. The Federal Deposit Insurance was later created as the long term solution to protect depositors losing their all their money when a bank failed.

The downward spiral depresses real estate prices further

The depositors of closed banks usually borrowed mortgage money from the same bank where they deposited their savings. When these customers could not make their mortgage loan payments the banks proceeded to foreclose on their real estate loans and sell the property to the highest bidder. The customers of failed banks not only lost all their savings but the same banks took their real estate equity too. This quickly became a downward spiral of foreclosures, auctions and falling prices.

It takes both cash and courage to buy real estate after a crash.

Only a few solvent banks survived the banking crisis and reopened. The lucky depositors in these surviving banks still had some cash. Some wise investors used their cash to buy prime real estate for pennies on the dollar. The few investors who bought during the darkest day of the depression ultimately became wealthy in the early 40s when World War II jump-started the economy again

Will a new National real estate crash repeat itself 60 years later?

I don’t think so. The real estate market situation is significantly different today. The danger of a future real estate crash depends on the public’s continued confidence in real estate as a good investment. We could all lose confidence in real estate mortgage institutions in the future if widespread accounting scandals, mismanagement and interest only loans reduce, the liquidly of the mortgage market. But, we are all smarter about investing in real estate today or are we?

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Ted Bailes