Speculators Drove the Housing Market Higher, and Now They Are Bringing it Down

The housing market in the US has been driven largely by speculators, and now is fading so quickly due to speculators pulling out of the market as fast as they can.

The housing market is just like any other market. You will have boom and bust cycles. The stock market has its bull runs, and then it has its bear runs.

When the stock market is in bull mode, everyone wants in. People take out second mortgages in order to jump into the market. People act on tips from friends, looking to jump into the next big stock. People buy outrageously expensive stocks, just hoping that they can eek a little bit more profit out of the company before it turns and heads lower.

As the market get hotter, more and more attention is paid to it. More and more people get in, and normally, the top is a big blowoff when everyone who wasn't already in, gets in. This is the top. The herd is almost always wrong.

It was the same thing with the housing market. Now don't get me wrong, there are still some very attractive real estate investments out there to be had. But in many areas of the country, you are going to see the bust cycle in full effect.

Housing prices started to rise. People started to sell their homes and move into larger ones. People who couldn't afford bigger homes took out liar loans, teaser loans and stretch loans in order to afford it. No big deal, they thought. This place will be worth $100k more in a year, so we can just sell it then if we are having trouble making our payments.

Outrageously expensive parts of the country became even more expensive. Everyone had a story of a friend who struck it rich selling their homes.

Home renovation and house flipping television programs became all the rage on TV. The Average Joe, who knew nothing about home flipping but decided to try it after seeing it on TV, bought and sold houses, normally carrying their own mortgage at the same time.

Television shows on CNBC and Bloomberg started to chatter almost daily about the housing boom. If you didn't own a home, they would say, you were missing out. Beg, borrow and steal to get a down payment.

The housing market continued to crackle, red-hot, driven by speculators who bought these assets, looking to flip them at just a little bit of a higher price.

Then, the market started to slow down and turn around. Lending criteria started to tighten. The sub-prime meltdown happened. Suddenly, people who were flipping homes were suddenly getting out at any price, even a small loss. Condo developments started to slow down, and many sat empty, with no one buying. People got in at the top, looking for easy money, and they were the first to bail, causing a downswing in housing prices which is still continuing today.

This isn't a doom and gloom outlook on the housing market though. This is a natural cycle. Once some of the speculative money gets flushed from the real estate market, then the housing market can resume its upwards trend. This might be six months, this might be a year, this might be longer. But the market will get back on course.

Don't curse out the speculative money too bad though. They are a big part of the reason why you sold your home for double what you paid for it in 2003.

They might be hiding out now, but they'll be back, and probably right at the top of the next housing boom.

Filed under: Real Estate News | The Economic Meltdown