I just came across an article from back in May that I found interesting enough to post here. It covers the topic of the recent epidemic of people buying real estate as an investment:
The National Association of Realtors in Washington, D.C., released survey results in March indicating that 23 percent of all residential real-estate transactions in the U.S. last year went to investors, rather than to buyers looking for a place to live.
Association spokesman Walt Molony said he believes this level of investor activity would apply to a market like Puget Sound’s. Glenn Crellin, director of the Washington State Center for Real Estate Research in Pullman, agrees.
23 percent seems to me to be a large number. That would mean that if I’m in the market to buy a house, roughly one out of every four people out there making competing offers on houses I’m interested in are just looking to make a buck. If I were looking for a house, that would rather annoy me. If these numbers are true for the Puget Sound area that would definitely help explain our bubble. Nothing like a little (or a lot of) speculation to artificially drive up prices.
“I lost a ton of my portfolio in 2001, and that’s happened to a lot of people in America,” Galasso said. “It spurred my interest in learning that there was a better way out there.
Fool me once… I hate to break it to you Mr. Glasso, but I’m not sure that real estate is a particularly “better way.” Thankfully, this article isn’t all glitz and glamor, and touches on the very real risk out there that we’re in a serious bubble that could burst any time.
Wolfson, who has been in the industry for nearly 20 years, says many investors are overextending themselves on the assumption that the market will remain favorable. He believes low interest rates contribute to this, he said.
“I’ve been in the industry long enough to see how it operates in cycles — and it cycles on [mortgage] interest rates,” Wolfson said. “I believe the market right now is in a bubble — people are putting 10 percent or 5 percent or zero down, or they’re taking adjustable rate mortgages, but then one day their renters can’t afford the rent, and the owners aren’t prepared for that.”
…investors have shifted their money from stocks to real estate and that, en masse, they are using the same mentality that created the hyperactive dot-com economy. Only now they’re using a different asset: housing. Such a marketplace, the book argues, must eventually correct itself.
And that is the real danger here. Just like every other speculative market, real estate / housing will eventually correct itself.
(Jane Hodges, Seattle Times, 05.03.2005)