punkwalrus (punkwalrus) wrote,

Real Estate Bubble

I mentioned in my previous post about the "real estate bubble" in our area. I call it a bubble, and it has to burst at some point. My main fear is that it will go something like this:

The inflated prices means that people will be getting those reduced mortgages where you only pay interest for the first 5 years. They are assuming that they will sell at a profit in 5 years, or won't be living there, anyway (like employment moves). They are not building equity, and this will lead to a lot of debt. When values on any commodity go up this quickly, I am sure people are buying homes not just because they want to live in them, but they consider it an investment. On top of all this, many houses are being built so fast around here, they don't really have time to build them properly. Already these overnight neighborhoods are starting to show their age prematurely with sagging foundations, plumbing problems, and so on.

Right now, commercial businesses are starting to have problems affording the land around here. Businesses will start to leave to find cheaper places where they don't have to pay high rent, taxes, or huge salaries so people can afford to leave nearby.

Not to mention interest rates are starting to creep up again. many people can afford to have a mortgage because they got a low interest rate. Ours is locked at 5.5%, but some got "variable rates" which go by market conditions. So yeah, they for a 4.2% rate, but when the interest rates go back up to 8,9, even 12% like they were 10-15 years ago, their rates will more than double.

At a certain point, the prices have to level off or the houses will become completely out of the price range of all but the richest buyers. When this starts to happen, those who just bought real estate as an investment will start to sell. This will cause prices to drop. Those who got houses in the last few years before that might be in a bind, because they have only paid interest, and now they are making house payments far above what their property is worth. Many people will have to sell at a loss, or worse, foreclose. "Lost another one to Ditech," will have a whole new meaning. This will cause properties to fall even further. This will have a panic effect, and the free fall of selling will begin.

Property taxes will not decrease. Why? Because they are paying for the infrastructure of all those new roads and schools and sewers they had build to support all the new development. Many of the businesses will start leaving in droves, and employees will go where the work is. More selling. Suddenly, many homeowners are living in decaying "recently built" houses worth far below their loan amount. They have to drive out to Winchester or Frederick to find work. Since people are leaving in droves, taxes go up to make up for the difference because even though no one is using the schools, roads, and sewers as much, they still have to be maintained in working order.

After a few years of a market panic, the real estate will reach a "sweet spot" plateau where buying these now uber-cheap homes is actually worth it. The state, in desperate need for more taxpayers, will make incentives for businesses to come back. There will be a boom not as much in new homes as "refurbishing old homes" that have fallen apart. A lot of these neighborhoods that went up overnight, became vacated by massive foreclosures, then made into low-income housing until they fell apart and were condemned, will be bulldozed down and made way for new homes. And the cycle will begin again.

Again, I am not an economist, and I am talking out of my ass. But this seems totally real to me, based on what I have seen and read about in our past.
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