Thursday, September 16, 2004

What could pop the real estate bubble?

I've been thinking lately about what might pop the real estate bubble and how it would affect me. I think there are a couple things that might do it:

Another scandal like the S&L mess a decade or two ago. This is probably unlikely, although there are signs of trouble at Fannie Mae and Freddie Mac (or if not trouble, at least suspicious financials).

I don't think raising interest rates will do it. I think raising rates are inevitable and yes, there will be people who will default and perhaps an increase in the foreclosure rate. However, I don' think it will be widespread enough to make a huge difference (except to those investors that recognize it and act on it).

But I think the biggest threat is the mushrooming federal deficit, coupled with the Republican tax agenda. More tax cuts for the wealthy. More tax burden on the middle class. Increased spending. The tax code will need to be changed to support the increased spending. There are proposals out there that have been looked into by the GOP (and others) to radically overhaul the tax system - create a flat tax, a national sales tax, etc. (See this Seattle Times article for details.) What these proposals have in common is "simplification." If you examine them, you realize "simplification" means eliminating deductions. And that means no tax deduction for mortgage interest.

That will kill housing. Millions of people will no longer be able to afford their homes. The market will be flooded with houses for sale and prices will plummet.

Now, to be sure, there are many interests against these plans. However, the GOP is quite good at sneaking legislation into law through misdirection, lies, and spinning the truth. These proposals bear watching.

© 2006 Shaun | Site Feed | Back to top