The boom and bust cyclical model currently effecting the real estate market is nothing new, although when the bust suddenly hits it most assuredly can surprise you.
Billionaire investor George Soros states in his book Open Society, Reforming Global Capitalism: “The construction industry is notorious for its boom-bust character, and after every bust bank managers become very cautious and resolve never to expose themselves again. But when they are awash with liquidity and desperate to put money to work, a new cycle begins. The same pattern can be observed in international lending. "
Given the fact that markets are becoming increasingly global, the shake up is occurring worldwide. A mortgage broker friend of mine in Great Britain has confirmed that Bear Stearns is not the only investment banker having trouble.
Market reflexivity is a source of disequilibrium. Notable economist John Maynard Keynes accounted for the reflexive phenomena describing financial markets as a beauty contest where people have to guess how other people guess. Keynes made a great deal of money as a speculator.
By concentrating on the money supply's tendency to expand and contract, the reflexive phenomena inherent in credit can be more predictable and measurable. Credit undoubtedly plays an important role in economic growth. Similarly the ability to borrow greatly enhances the profitability of investments. Leverage other people's money increases the potential rate of return, providing the cost of money remains the same.
In times of uncertainty, capital tends to return to its place of origin. This is precisely what has been occurring across Central Florida as British investors have opted to pull out, stay home, and patiently wait to see what happens.
CBS evening news reported last night that home purchases rose slightly by 2% (and a bit more in a few isolated areas) last month compared to former dismal months. There again we have the media trying to “stay positive" and increase investor confidence every chance they get.
The truth of the matter however is prices are likely to continue steadily falling. One somewhat savvy professional told CBS, “Look for home prices to hit rock bottom in about two years. "
Undoubtedly there are some deals for homebuyers now, but for those who can patiently wait even longer there may be even more. The only possible problem is widespread inflation, which if that occurs could send prices soaring to keep up with the ever devaluing dollar.
Since the U. S. government has a history of being pro-inflation to pay off its massive ongoing debts (i. e. , the Iraq war and the global war on terror), I would look to oil prices above all else to be a signal as to the direction of home prices.
The price of oil often is way ahead of the curve when it comes to the value of the dollar. Since the Middle East and Opec are already discussing a basket of currencies and a proposed shift away from U. S. dollar exclusivity, anticipate inflation and home prices rising eventually to catch up. That being said, in my estimation buying real estate a few months after a new President is inaugurated in January, 2009 looks like a great time to buy.
Paul Davis is Central Florida's favorite and most reputable property appraiser frequently called upon by banks, homeowners, and savvy real estate investors to assess property values. Mid-State Appraisals is FHA approved. A builder for over twenty years and also a real estate broker, Paul Davis brings a wealth of knowledge to the table as an appraiser.
Paul's company Midstate Appraisals is FHA approved and serves Central Florida (Lake, Orange, Seminole, Osceola, Sumter and Davenport in Polk counties).
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