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Why Is There a Fear of a New Real Estate Bubble?

Experts fear that the rise in interest rates is creating the ideal scenario for a new real estate crisis in the United States, similar to the one experienced in 2007.

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LatinAmerican Post | Santiago Gómez Hernández

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For several months, the possibility of the world economy collapsing has been considered. Recently, the mortgage industry in the United States is experiencing the first signs of a housing bubble. However, experts ask for calm and not to speculate or panic. Although there are signs of a possible crisis, it does not mean that we are on the brink of it.

However, today we are beginning to see the impossibility of many American families to pay their mortgages and loans due to the high interest rates of the banks. Some believe that the increase in interest rates, after years with low interest rates that encouraged loans, was the trigger for the current context.

First Guaranty recently filed for bankruptcy after making loans in early 2022 that have fallen in value. Apparently, the company was financing these loans in order to accumulate a large amount of these and sell them as bonds. However, the increase in interest rates reduced the volume of loan applications and the strategy of creating bonds does not seem to be working.

Why Are Interest Prices so High?

The Fed (Federal Reserve System) and all the central banks of the world decide to raise their interest rates as an economic measure. Precisely, the most recent increase in interest rates in the United States, at the end of July, was due to a strategy to curb historical levels of inflation.

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Recently, the entity in charge of US monetary policy decided to raise, for the first time in modern history, interest rates twice in a row by 0.75%. Previously, they only did 0.25% increments and decrements. This left bank interest at a minimum of 2.5%.

High borrowing costs for American households are ending in an inability to repay these loans. Against this background, massive bankruptcies are just around the corner, and this would wipe out the entire construction industry that employs a large part of Americans.

What Is a Housing Bubble?

A speculative phenomenon in which the prices of real estate and real estate are elevated without support is known as a real estate bubble. This indicates that in the market the prices that are handled do not correspond and there is an imbalance that will be brought down at any moment. For this reason it is precisely known as a bubble, because just like a soap bubble it rises quickly. However, at any moment it explodes.

When the bubble bursts, it causes owners or investors to lose the value of their assets. This is a time when owners do not sell, since the prices of their properties, which they recently bought, are below the price at which they were purchased. It's lean cow time. On the other hand, if your intention is to buy a home or real estate, and you have the capital, you can buy because prices are reaching their real and not speculative levels.

Today we are seeing it in the mortgages and loans that American families have taken out because they are being unpayable. This means that those companies and banks that have earmarked loan capital are at risk of losing it when families go bankrupt.

Voices Asking for Calm

Despite the fact that many today fear a recession and a financial crisis that is linked to the real estate industry, there are also voices calling for calm. Phil Shoemaker, president of openings at mortgage lender Home Pint Financial, told the Chicago Tribune that “if you look at what's happening with home price appreciation, it looks like a bubble. But if you look at the fundamentals behind it, it's hard to say that it is." The expert warns that, today, the housing supply is still close to the minimum and debtors are more solvent.

However, it will be pertinent that today, if you are looking for a home, you remain cautious and study the market well. This is not the time to panic, but to be more cautious and not risk your investment or your life savings.