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- Nov 19, 2007
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Editor`s Note: Put the World`s Top Financial Minds to Work for You[/b]
You've got to be kidding. Even most second- and third-time homeowners probably aren't paying 100 percent cash.
The fact that this bull market is driven so heavily by cash purchases tells you that it's not a real housing market. It's another investment bubble.
In some places, like Florida and Nevada, the cash sales represent a whopping 65 percent of the market. And in Arizona, the figure is close to 50 percent.
So booming housing markets are clearly not booming because of a fundamental demand for housing. They're booming because of investment demand.
Why does that matter? An investor-driven housing market is fragile by definition. While general demand for housing depends on fundamentals like household formation growth and income growth, investment demand is much more fickle. It could dry up in a hurry, especially if the market doesn't live up to investor expectations.
Take a company called American Homes 4 Sale, which, after raising over $700 million in its IPO in July, has already laid off 15 percent of its work force. A big reason for that might be the fact that nearly half of the homes the company has bought are still unoccupied.
As always, a bubble can be maintained as long as prices keep going up. But when prices fall, it could create real problems. That's why higher interest rates are not welcome news to the housing market. Add to that the fact that a lot of newly built apartments will be finished in the next 12 to 18 months, and that puts even more downward price pressure on the housing market.
This bubble may not pop in the next few months, but I don't think the long term looks good for a fake housing market driven largely by investors rather than homebuyers.
MONEYNEWS:
-family: times new roman;">About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $300 million under management. He is a regular contributor to the Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.
You've got to be kidding. Even most second- and third-time homeowners probably aren't paying 100 percent cash.
The fact that this bull market is driven so heavily by cash purchases tells you that it's not a real housing market. It's another investment bubble.
In some places, like Florida and Nevada, the cash sales represent a whopping 65 percent of the market. And in Arizona, the figure is close to 50 percent.
So booming housing markets are clearly not booming because of a fundamental demand for housing. They're booming because of investment demand.
Why does that matter? An investor-driven housing market is fragile by definition. While general demand for housing depends on fundamentals like household formation growth and income growth, investment demand is much more fickle. It could dry up in a hurry, especially if the market doesn't live up to investor expectations.
Take a company called American Homes 4 Sale, which, after raising over $700 million in its IPO in July, has already laid off 15 percent of its work force. A big reason for that might be the fact that nearly half of the homes the company has bought are still unoccupied.
As always, a bubble can be maintained as long as prices keep going up. But when prices fall, it could create real problems. That's why higher interest rates are not welcome news to the housing market. Add to that the fact that a lot of newly built apartments will be finished in the next 12 to 18 months, and that puts even more downward price pressure on the housing market.
This bubble may not pop in the next few months, but I don't think the long term looks good for a fake housing market driven largely by investors rather than homebuyers.
MONEYNEWS:
-family: times new roman;">About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $300 million under management. He is a regular contributor to the Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.