6 World Education Blog

We have all heard it. The real estate bubble has burst or is at the very least deflating. Homeowners in approximately two-thirds of the country are watching their home equity melt away. While bemoaning the fact your equity loss is painful, there is still time to look sensibly for housing deals and act accordingly if we begin reassessing how we view real estate.

This article is the first of a series that will provide an explanation of the phenomenon of the housing bubble, why it had to burst and perhaps most importantly, how we should now approach housing as the housing market corrects. Rest assured, the long term picture of rising property values will return as it is fundamently still your best and most important investment. However, in the meantime we need to take stock, just as we would any investment, and assess which way to go from here.

Unless you are a professional investor, most people view their home as a place to live and raise their family while paying bills using wages earned in a growing local economy. Perhaps it is time to look at your home for what it really is a commodity. And just as any commodity, whether it is common stock, pork bellies or real estate, it is subject to the same economic principles that will make its price increase one day and fall the next. The only real difference is the amount of time it will take for the housing market to respond to those factors influencing its price.

What is it that causes your home to have value? The obvious answer is and always will be how much demand is there by potential buyers of your home. Think of it a like selling art. Its selling price is determined solely by what others will pay for it. If the art looks as if it were scrawled on the back of an envelope, you will have few buyers. Conversely, if the art has mass appeal, much like the famous Currier and Ives prints seen so frequently on classic Christmas cards, then there will be more potential buyers.

The greater the number of potential buyers creates the demand (as defined in economic terms) for your home. If you are located in an area where the local economy is brisk, companies are expanding, everybody is enjoying an increasing standard of living, there will obviously be greater demand for housing in the area as more job seekers move to the community in an effort to cash-in on the local prosperity. If you are one of the lucky ones who own a home in the community, the increase in the value of your home is a direct result of its demand. You can see from this example that the value of your home is not a reflection of the construction cost, but rather demand. This is the very reason a home in Sioux City, Iowa is priced less than a home of comparable size and construction cost in Boston.

How expensive must house become before no one will buy? Let us look at an example that has existed in numerous communities in California and south Florida. We will use an an continue reading