there has to be a massive recession at some point to deflate both equities and real estate to normalized levels the only question is when
very soon IMO. It's literally taken 7 years for the market euphoria to finally develop...These recent high's have a great deal of "bagholder transfer" written all over them.
Why are they calculating using mortgage leverage (only 20% down) yet not counting using retail margin leverage (4-1 buying power) with equities? Flawed study
I live out in the San Diego area and residential real estate prices are incredibly expensive. Was very hard for me to rationalize why people were willing to spend so much on these unimpressive properties, until I did a little arithmetic on a 30-year mortgage repayment schedule: Amount borrowed: $650,000 Interest rate paid: 3.44% (prime rate as of the past October) Monthly payment: $2,897 Amount borrowed: $458,000 Interest rate paid: 6.50% (rate in year 2005) Monthly payment: $2,897 The question in my mind, is what does buyer A who just bought at $650,000 do if mortgage rates creep back up to 6.50%? Yes, he bought at a fixed 3.44% mortgage rate, but he will then be selling to buyer B who can only get a 6.50% rate mortgage, thus drastically lowering how much house they can afford. I suspect buyer A will sell to buyer B at a much lower asking price, and then default on the remaining $200,000 thus crushing the banking system once again. Obviously there is no reason to think rates are going right back to 2005 levels, but you never know, and the consequences could be huge.