Downturn prediction

Higher interest rates coming

BusinessWeek is predicting a real estate slowdown caused by a tighter monetary policy, higher interest rates and a slowing economy. The publication suggests that interest rates will reach 7% by 2006. As interest rates increase the amount of house that buyers can afford is reduced.

The amount of wealth created through home value appreciation is staggering. Between 2002 and 2004, homeowners who have refinanced have taken $400 billion out of their homes. Most of this cash was dumped back into the economy, creating significant economic growth. A 2002 Federal Reserve study found that the average homeowner pulled $26,700 from their home with each refinancing.

I find it interesting that the risk of investment speculation has been shifted from the building industry, which traditionally built on spec for end-users, to the end-user themselves who are investing directly in speculative real estate. I am still cautiously optimistic that investors can realize strong returns through real estate investments. As always, the key to having a positive investment experience buying correctly, having patience and setting realistic expectations.

After the housing boom [BusinessWeek Online]

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