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Bob Meyer

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Low Interest Rates & Speculation Cause Of Real Estate Upswing

According to David Stockman, former director of the office of Management and Budget in the Reagan Administration, there is no true organic, sustainable recovery taking place in the U.S. real estate market.

Instead, prices are moving upward due to the artificially low interest rates and speculation � cheap money is being put to work by big investors. Fast money is rolling in from professional investors, like hedge funds and private equity firms, for the purpose of buying-to-rent. It is done on a purely speculative basis, for a quick turnaround.

Stockman predicts that these big speculators will be gone as fast as they�ve appeared, which means as soon as they conclude prices have moved enough for the quick profit.

The two forces needed for a solid recovery are missing: (a) first-time buyers and (b) trade-up buyers. Neither of which are available in today�s market. The younger generation is faced with high unemployment and staggering student loan debt. And the baby boomers, who are heading for retirement with less than adequate savings, will be trading down with their homes, not up.

Stockman foresees another bust down the road, because the trigger for a real estate bust is simple � a rise in interest rates. (He suggests the U.S. government can�t have zero rates forever.) So as soon as the Fed normalizes interest rates, housing prices will stop appreciating and most likely dip down again.

The answer to a more normal market, according to Stockman, is to let the market decide, rather than relying on a government policy of no-down payment loans, �liar� loans, and a degradation of lending standards with the objective of obtaining 69% home ownership throughout the country.

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