Monday, May 23, 2005 - As Prices Rise, Homeowners Go Deep in Debt to Buy Real Estate

Real estate deals, just like stock deals go bad all the time; most real estate deals of late have been very sweet. Everyone keeps trying to pick the top. The problem is that the top of any market tends to be a steep precipice that is reached long after the first calls for a top. Do your remember the irrational exuberance in the stock market in 1998? The market peaked a couple of years after the call.

Money is cheap-mortgage rates are headed down, 76 million baby boomers are at prime earnings ages and homes are in demand. The real estate market has a good year ahead.

In Big Bull Markets, stocks and real estate go up together. Part of the wealth that is driving the real estate market is in 401-K plans. Those who are saving large amounts annually feel justified in using leverage outside the accounts to buy real estate. This is a perfectly logical action to take.

Lending institutions are being asked to tighten standards. This request is also reasonable. The leverage involved in real estate adds risk. Homes do not normally swing in value more than 20% in a few years time. With demand still extremely high, those who invest 20% in second homes are currently finding 100% equity gains in a very short period of time. The Bull is not over.