Best Mortgage Deals
Advice, help, information and guidance on the best mortgage deals available

Best Mortgage Deals - Investing In Property In The US

best mortgage deals by AnnaNow before we look at how to choose the best mortgage deals available, we need to understand a little about how the property cycle works and when is the best time to buy. Now clearly nobody has a crystal ball ( least of all me) but there are signs and trends that you can look for, before going ahead with the biggest investment of your life. I fully accept that on occasion you have no choice and have to buy whatever the market conditions. However there are times when renting actually makes more sense than buying, and if this is an option for you, then it is better to wait for prices to fall, before diving into the market. As in trading, timing is everything! Naturally if you have to buy for family or business reasons, then you have no choice, but do consider renting as an option, particularly if you feel the market may fall in the short term.

Best Mortgage Deals - Boom and Bust Property Cycles

As a trader, I like to make money, whether from the financial markets, or from property. Like you, I also like to feel that my own home is also increasing in value, so before buying I will always try to gauge where we are in the property cycle to see whether we are buying at the top, the bottom or somewhere in the middle. So before we rush off to find the best mortgage deals let's take a look at the cyclical nature of the market and try to get a better understanding of where we are at present. 

In the past, national economies have operated with a degree of independence. Today, we all sink or swim together: the major economies of the world are synchronised into a single business cycle and so are property prices. From the booming markets in California, to the hot spots in Europe, and the rocketing house prices in the Far East and China, all have one thing in common. Prices have been rising to record highs. Fuelled by cheap money, low interest rates, and a general feel good factor in the economy, investors and home buyers have been putting their money into bricks and mortar like never before. Overseas properties, second homes, buy to let, commercial, all sectors have been booming. But can this last forever? - the answer of course is no, and the property bubble has already burst in many parts of the world. If history is any guide then property prices will fall for the next three years, from 2008 to 2010 and from 2010 onwards an economic depression will follow as retail confidence collapses. I'm sorry that this does not make very pretty reading, but these are the facts as I see them at the moment. Let's start by taking a look at the US housing market.

Best Mortgage Deals - US Housing Market Cycle

Peaks In Land Value Peaks In Construction Depressions
Interval In Years Interval In Years Interval In Years
1818       1819  
1836 18 1836   1837 18
1854 18 1856 20 1857 20
1872 18 1871 15 1873 16
1890 18 1892 21 1893 20
1907 17 1909 17 1918 25
1925 18 1925 16 1929 11
1973 48 1972 47 1973 44
1979 6 1978 6 1980 7
1989 10 1986 8 1990 10
2006 17 2006 20 2008? 18

 

The above table shows the relationship between peaks in land values and construction rates, which have subsequently indicated and then resulted in a depression.

In the last five years, house prices in the US have doubled. This scenario cannot continue indefinitely for the simple reason that at some point they become unaffordable. Salaries  can’t rise as fast as house prices can when a speculative frenzy is underway, so there will come a point when the average man or women cannot afford to buy the average house, and prices have to fall as a result.

All markets and economies go through periods of expansion and recession, boom and bust if you like, and the property market is no different. Many economists now believe that in the property world, this cycle tends to be based around 18 years periods ( approximately ). With the last one in the early 1990's I would suggest the next one has already arrived. So what triggers these peaks and troughs? For the homeowner, the most obvious factor is interest rates. When interest rates rise, or even with the mere speculation that they may, buyers begin to be a little more cautious again. Mortgage repayments become more difficult for some owners, which in turn leads to homes being put back on the market, often at lower prices. Low interest rates encourage us to borrow too much for our houses, and the banks willingly lend on the expectation that in the event of any problems the property will more than cover the debt in the event of a default. As house prices rise we feel more wealthy and the cycle continues, ever higher. Eventually interest rates start to rise to cool demand, but only slowly as governments and central banks the world over are terrified of causing a recession ( often called a hard landing!!), so they act slowly, and generally too little too late - the damage has already been done.

Now if interest rates were set by the free market, then in my view many of these cycles would be eliminated altogether, but in most developed economies, the interest rates are manipulated by central banks or governments themselves. All of them have one thing in common - they are terrified of inflation, where a reduction in interest rates too early, could create an inflationary economy, leading to job losses and a slump. Most observe the wait and see approach, by which time it is generally too late. The problem that most governments and central banks have today, is that of stagflation. This is simply where we have both inflation and stagnation in the economy. In other words the economy is in decline, but we also have inflation. To reduce interest rates would lead to an increase in inflation, to raise interest rates would raise the chance of a deeper recession. Such is the problem at the moment, both in the UK and US. The US has already bitten the bullet and cut interest rates hard, the UK which we will look at shortly, has not. And you thought buying property was all about the best mortgage deals - I wish it were so simple!!

Governments always think they can in some way control boom and bust cycles, but so far they have failed. Why? Because their economic models are overly focused on labour and capital rather than on land and property prices, the things that really drive economies. My own view is that because the supply of land is one of the few things that is finite by nature, then it is land that will dictate our economic fate. So while we may talk to friends, neighbours and colleagues about investing in property ( or bricks and mortar) what we are actually saying is we are investing in the plot of land beneath the house. The price of land is the best leading indicator we have of the state of the economy and the future of house prices. With the peak in land values in 2006, a recession is not far behind!

Now let's take a look at the UK market and remember it's not about finding the best mortgage deals, but finding the best time to buy!

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