SolveYourProblem
Real Estate Article Series
Real Estate Bubble: How Can It Affect You?
The
real estate bubble is a much discussed phenomenon used
to describe a situation in which property values,
both or either commercial and residential, expand very rapidly. The result is an over-inflated market that sees buyers purchasing
property at prices far above standard value while fearing the
market will burst and property values will plummet as fast
as they rose. Buying in such a market can be risky for those
who cannot afford to lose on their investment.
It’s
difficult to say what qualifies as a bona fide real estate
bubble and what is just a hot market. There is no quantifiable
standard to identify a real estate bubble and so we are left
to depend on experts to tell us which areas of the country
are experiencing a bubble and which areas are not. However,
not even the experts can agree on the difference between a
bubble, which is risky and unstable, and a boom, which has
less risk of a rapid downturn. Some mortgage companies and
other organizations with an interest in the real estate industry
study the market and produce reports to help buyers identify
potential windfalls and potential pitfalls by naming cities
with what they determine is the greatest chance of a bursting
bubble.
Homeowners
who buy in a real estate bubble situation risk putting
themselves in an undesirable financial situation, particularly
if they have very low equity in their home. Equity is how much
of the home you own, as opposed to the portion owned by the
bank or other lending institution. If you have a lot to pay
off before the home is truly yours, and the bubble bursts,
you can find yourself in a position where you are paying off
a significant debt on a property that can no longer fetch the
same or higher value you paid for it. Of course, such a loss
is only theoretical unless you actually try to sell your home.
Property values fluctuate up and down on a regular basis, with
both dramatic increases and decreases in value, so if you can
stay in the home until the value rises again (even if it doesn’t
go all the way back up), you can avoid significant losses when
it does come time for you to move. If you are forced to move
before the market becomes more favourable, you could find yourself
in a negative equity situation, which will affect your ability
to buy your next home.
The
situation is less serious if you have greater equity in
your home, or if you have the financial ability to absorb a
loss, in which case a bursting bubble situation is more of
an irritant than a financial catastrophe.
If you’re a person of average financial means who wants to
buy a property in an area that may be undergoing a real estate
bubble phenomenon, do so from an informed position. Be
aware of the potential for loss and measure carefully the pros
and
cons of going ahead with your planned purchase. Do a little
homework before you jump into a purchase: follow the local
market for a couple months and track fluctuations; take note
of any sale trends, and pay attention to what the experts (conflicted
as they may be) report about the area in which you are interested.
Use all of the information you gather to help you determine
whether your potential positives outweigh the potential negatives.
Practicing
common sense can help you survive a bursting bubble scenario
in the best possible shape. For example, it is wise
to minimize your overall debt load to help you manage your
financial burden if you are forced to move at an inopportune
time. Invest your equity and any unexpected financial gains
into improving the value of your home rather than in luxury
or impulse buys. Most real estate experts agree that you can
recoup between 80 and 90 percent of your investment in remodelling
a kitchen or bathroom when it comes time to sell your property.
Of course, your best protection is to purchase a home with
excellent re-sale potential to minimize possible losses if
real estate values plummet unexpectedly. # # # # #
SolveYourProblem.com : 2007
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