EconMatters: The housing market appears to be in better shape than it really is and investors should be wary regarding investing in Housing stocks, investing in property not as a primary residence, and should conduct a thorough analysis of their own financial obligations with regards to their primary residence.
In many parts of the world real estate prices have risen quite substantially due to several factors, one is foreign buyers trying to move money out of their home countries for security purposes. Another is institutional investors hoping to buy low and sell high in an investment strategy, and then there are the small to medium size professional flippers who buy properties, make some cosmetic changes, and hope to sell these properties into an improving market because supply is artificially tighter, and the broader economy is better than when they originally purchased the properties.
However, there are a couple of macro dynamics that are going to provide significant headwinds for the housing market. One is taxes, and all the financial obligations that are rolled up into property taxes. As governments continue to spend more and more, local as well as state, jurisdictional, and federal the fundamental result is that property taxes continue to rise on real estate.
The property taxes are the real killers in real estate because a homeowner can even diligently pay off their mortgage and owe nothing on their home (which is becoming rarer these days), but still even in these best of circumstances the future property tax obligations are going to catch up to the homeowners as their income shrinks once they retire.
Subsequently these individuals incomes shrink drastically, but the property taxes continue to escalate as these local and state jurisdictions need to get more money to support poor fiscal spending policies, and eventually homeowners have to sell their homes because they cannot afford a decade`s worth of property taxes.
Fortunes Acquired Elsewhere Often Get Lost in Real Estate Market Crashes
The more expensive the real estate the higher the taxes which when the tide goes out in the economy, and people become overextended, then they have to start dumping real estate, and inevitably there is a huge margin call that runs through all financial assets, and hits real estate especially hard.
Many multi-millionaires have lost most of their net worth mainly due to an overextension on real estate when times are good to find that the haircut on these properties when they need to sell via a fire sale just cripples them financially.
The dynamic is as follows: They need to sell, but there are many people in this boat, the few buyers out there get spooked, prices fall sharply, but they still need to sell, so these sellers are forced to take 50 to 60% losses on these properties. There goes all the stored wealth like a vanishing mirage that the investors were trying to protect by investing in hard assets – it is really a vicious, pernicious cycle that repeats itself over and over in the real estate market.