Sorry folks, but this fantasy can't last forever.
Housing prices have risen at a meteoric rate for quite some time now, and the growth of real estate is simply unsustainable.
The real estate market has recently been referred to as a "bubble" - an economic market in which prices have become irrational because of consumer behavior. The reason for this is nonsensical behavior eventually causes the market to correct itself, resulting in a significant drop in prices. The best example of this was at the end of the 20th century, when technology stocks were traded at more than $100 a share while many companies hadn't turned a profit yet. The bubble eventually burst, and countless investors lost huge sums of money.
A quick survey of the home-buying market makes it clear why such a term is being thrown around. Rather than securing standard financing on a home such as a 30-year, fixed-rate loan with a down payment on the balance as one normally would, many homebuyers have taken significantly higher risks in hopes that housing prices will continue to rise. And as long as they continue to rise, a handsome profit will be made when the home is sold in several years.
However, problems will arise if housing prices don't continue to grow. Currently, one popular option among homebuyers is an "interest-only" loan, in which the homebuyer only makes interest payments on the loan. No portion of the monthly payment goes toward the loan principal. The result is a lower monthly payment, but also a loan with a value that doesn't decrease.
Another popular, but more speculative option, is a negative amortization loan. With this speculative loan, a minimal payment is made each month. The payment is actually less than the monthly interest payment. In effect, this loan adds interest on top of interest in the hopes that when the house is sold, the price appreciation will pay off the loan and the additional interest due.
With both of these options, if housing prices flatten out, homebuyers will be in dire straits. In many cases, when a homebuyer secures one of these loans, the payment they make is the maximum amount they can afford. When housing prices drop and the individual is forced to make principal payments on top of the interest, the result is an unaffordable mortgage. Thus, when housing prices inevitably cool off, many homebuyers will sadly see their mortgages foreclosed.
Ironically, real estate is historically not a sound investment. Real estate has only appreciated at a rate of 1.46 percent a year since 1980, while stocks have grown at a rate of 9.2 percent, according to Newsweek magazine.
Another factor most people don't take into account are the additional costs associated with real estate investment. While trading stocks typically only involves broker commissions, real estate includes closing costs, property taxes and maintenance, according to Newsweek. Thus, combining the risky financing with historically substandard gains, real estate investment doesn't appear to be as great an idea as many believe it to be.
Purchasing a home is a common goal most people have. When done sensibly, it can be achieved in a relatively risk-free manner. However, many simply get greedy, several of whom are bound to lose quite a bit when the real estate market cools off.
Remember, if people are wondering whether something is a "bubble" or not, it probably is already.
-Jonathan Sullivan is a finance senior and a staff columnist for The Daily Aztec.
-This column does not necessarily reflect the opinion of The Daily Aztec. Send e-mail to letters@thedailyaztec.com. Anonymous letters will not be printed - include your full name, major and year in school.
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