Recently, there has been a lot of speculation about the real estate market and the potential drop in prices. Experts, citing historical data, state that the market isnt capable of sustaining the high prices and low mortgage rates common in todays market. However, looking at the major real estate price decreases in the past show different reasons for the bust than are being used for todays market.
The stock market crash of 1929 has gone down in history as one of the worst depressions of all times. What often gets lost in the telling of that tale is Floridas real estate bubble bursting five years prior. During the 1920s, the market was on the rise and people were burning to show their wealth. Vacation homes became a hot new trend, and Florida was the place to go to escape the torturous winters up north. Of course, homes had to be built to accommodate the new arrivals, and this led to a building boom. With the building boom came land speculation. Within a year, real estate prices quadrupled, bringing more investors. Miami teemed with golf courses, hotels, extravagant mansions, and restaurants offering Broadway-like shows at every meal. Investors in Florida real estate made millions by buying on credit, fully confidant that the return on their investment was secure. After all, unlike the stock market, buying land was tangible. But what goes up must come down, and in this case it came down with a horrific splash.
As the market soared, so did the prices, and by 1925 land had out-priced its biggest spenders. New investors failed to show up to breath life into the area, and old investors grew timid, preferring to sell rather than buy. Unfortunately, with no new investors, selling became a problem. Panic set in and prices plummeted as investors tried to recoup what theyd spent on credit to avoid losing everything. As quickly as it rose, the real estate bubble in Florida fell. Businesses collapsed, homes were lost, and millionaires became paupers. Then The Big Blow came.
In September of 1926, the largest hurricane in Floridas history smashed across the state. The unnamed storm brought with it 150 mile per hour winds, and unleashed a powerful tidal wave that obliterated entire towns. By the time The Big Blow was gone, so were millions of dollars of property, and over 300 people were dead. Three years later the stock market crashed, and any hope of rebuilding in Florida crashed with it.
Thanks to WWII, the United States wouldnt see another real estate belly flop like that for 60 years. But the next time it came, it hit nationwide.
The 1980s brought the U.S. a time of relative safety and peace. Ronald Reagan was in the White House, bringing with him a newly forged friendship in the U.S.S.R., and Reagonomics. Also called The Trickle-Down Effect, Reagonomics believed in big business leading the way toward economic stability. With this economic plan in place, the mantra in the real estate market became, If you build it, they will come. Investors poured millions of dollars into the building markets, which in turn created hundreds of homes and offices across the country. The idea was to create a demand by offering the supply. And it worked for a while.
As the economy slowly shifted upward, buyers looked toward upgrading both homes and offices. The bigger, better view became an important aspect of any home or office, and the builders were happy to oblige. It became difficult to keep ahead of demand, but investors continued to tip money into the building machine. Eventually, they pulled too far ahead of the demand both in supply and price. Office buildings in prime locations sat vacant. Beautiful homes remained quiet and empty. As in 1925, prices fell drastically, and investors, desperate to hold on to what little they had left, jumped ship. Another bubble burst.
What makes todays real estate market different from these examples? For starters, the majority of homes being built today are in established markets, unlike in Florida. As cities grow, new houses are being built to accommodate the influx. With the U.S. population growing at the highest rate of any other first-world nation, that influx isnt expected to drop anytime soon. And todays investors build according to demand, rather than to create demand. This has led to a steady increase in prices, dramatically different from the above examples where prices grew dangerously fast.
To learn from history is to prevent repeating it, and todays investors seem to have done just that. Speculation continues, but with a sensible hand, and building booms keep up with demand without surpassing it. The real estate market is a different entity today than ever before. So while the experts go on about the bubble bursting, keep in mind that this bubble is made of different stuff.
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