The introduction of new and extended categories about Real Estate, reminded me of the stock market; the period just before a decline. . .
Although real estate is less speculative than investments at the stock exchange, speculation still plays a role.
Real Estate promoters take a risk when they decide to start a new building. Because the construction activity is a cyclical; during a boom, construction companies will increase their supply of real estate based on the extrapolation of previous trends. But there comes a moment where the new delivery of homes exceeds the new demand for housing. Combined with a change in mortgage rates will make the market more uncertain.
House owners at the other end, take a risk when buying a new house: Although you need a house for living, the risk is that you use the overvalue of your current house to finance a new and more expensive one. This will stay profitable, as long as house prices will keep on rising. When prices are stabilizing (or declining), this automatic value increase will stop and with it the incentive (cycle) to reinvest. . .
But how do you know whether your are entering the danger zone? For investment in the financial market, there are the numerous indicators that are used to get more grip on trends and movements. People try to use all kind of information to base their analysis on.
One such a - unofficial - indicator is the length of women skirts. When hemlines are moving up the end of the bull market is probably near; “don't go long on short skirts, " is the saying. (business week: www.businessweek.com/bwdaily/dnflash/sep2004/nf2004097_1337_db042.htm). This hemline theory is very controversial though. So we have to look for other non-financial indicators.
Remember the last time you were at a party. It was the time of a very good stock period, a real bull market and people start to talk again about their investments. In fact, investments were again the talk of the town. That is also an indicator that you should take care; when the last unexperienced investor starts to buy, the market will be overbought.
I just remembered this when I saw the new real estate categories. Is it already time to be more careful? For one, the mortgage rate is already going up. . .
© 2006 Hans Bool
Hans Bool is the founder of Astor White a traditional management consulting company that offers online management tools. Have a look at some of our free management tools