July 20, 2024


Mad about real estate

Is Real Estate a Risky Investment?

In consideration of the global economy people are reconsidering their investments into stocks, bonds, 401Ks, savings accounts and especially real estate. There was a time when no one would ask “Is real estate a risky investment?” because it real estate has historically been a sound investment.

Now, however buying real estate is considered risky business and has implications beyond your individual risk. In particular, Americans buying real estate outside of the United States are branded as disloyal and opportunistic.

State of Affairs
Because home prices have increased significantly, economists are not only assessing if real estate is a risky investment, they worry that the real estate market will stay flat for many years to come in markets where real estate was previously a booming business.
Appraisals on mortgage re-finance loans were over inflated causing what some would call a national bubble. In 2005, the Federal Deposit Insurance Corporation claimed home prices had grown nearly 19{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} faster than people’s income in Hawaii, nearly 20{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} percent faster in California and 25{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} faster in Nevada. Beyond those states, in 38 states, home prices increased by at least 6.7{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} than people’s wages over a one year period.

Another report released by the PMI Mortgage Insurance Company proved to be prophetic in 2005 when it determined home values would severely decline over the following two years and that is exactly what happened.

What has compounded this harmful reality is that some of the most overvalued markets were also some of the biggest and included most of California, New York City, Los Angeles, southern Florida and Boston.

So the answer to “Is Real Estate a Risky Investment?” is yes, yes, yes! This is in part to rapidly increasing property tax and insurance rates. Even for homeowners not holding a mortgage, these two expenses on the rise are jeopardizing people’s quality of life especially those on a fixed income.

In large part, increasing commodity prices are contributing significantly to the increase in insurance, as the costs of insulation and lumber, for example are more expensive than a few years ago. As a result the “replacement value” of property are calculated on those commodity prices thereby driving up the cost of insurance.
More Bad News

Also contributing to the increase in insurance premiums are the various hurricanes that have hit the United States making real estate a risky investment from that perspective. Additionally, people living in Western Europe and Australia are aware that the real estate problems are not isolated to the United States and are struggling with many of the same problems.

Even though the real estate collapse in New York City and Boston back in the late 1980’s may have been a distant memory, it has begun to come closer to the surface recently. And because so many made their investment into real estate long before the current crisis they will unfortunately be trapped in their homes because of severe negative equity.
Therefore, without question, at this point and time, given the domestic and global economy, real estate is a risky investment.