The problem facing real estate today is
two fold. First, is the leverage factor problem. The 30-year mortgage was part
of Roosevelt’s New Deal, which most Americans don’t realize his part in
creating the 30-year mortgage. Real estate prices collapsed along with bank
failures of the 1930s. Real estate collapsed to about “ten cents on the
dollar.” Roosevelt created Fannie Mae to revitalize the real estate
market by providing 30-year mortgages. Now, if Fannie Mae is closed, which
accounts to something like 90% of the secondary mortgage market, along with the
potential for a banking crisis in our future, one faces a massive deflationary
(negative) impact on the real estate market. (I don’t believe that 30-year
money will be available to mortgagees much beyond 2016.) Most individuals still
believe that the value of their home will always rise in value, which will be a
colossal mistake. Second, is the negative impact from real estate taxes. With
state and local governments going broke, not able to balance their budgets,
real estate taxes will be a prime resource in trying to balance these budgets,
especially at the local level. Chicago, which is in a dire financial
situation, is proposing to raise property taxes by 30%. You may think that this
is only an anomaly for Chicago, but a hike to your real estate taxes is
definitely on the economic horizon.
Therefore, as 30-year mortgage money
dries up and real estate taxes rise, real estate values will decline.
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