If you own real estate or are thinking about buying real estate, you better pay attention, because this could be the most important message you receive this year regarding real estate and your financial future.

The last five years have seen explosive growth in the real estate market, and as a result, many people believe that real estate is the safest investment to make. Well, that is no longer true. The rapidly rising real estate prices have caused the real estate market to be at price levels never seen before in history when adjusted for inflation! The growing number of people concerned about the housing bubble means that there are real estate buyers available. Fewer buyers means prices are going down.

On May 4, 2006, Federal Reserve Board Governor Susan Blies stated that “housing has really peaked.” This follows in the footsteps of new Fed Chairman Ben Bernanke saying he was concerned that “softening” in the housing market would hurt the economy. And former Fed Chairman Alan Greenspan previously described the housing market as frothy. All of these leading financial experts agree that a viable recession already exists in the market, so the reasons behind this change clearly need to be known.

3 of the top 9 reasons the housing bubble will burst include:

1. Interest rates are rising – foreclosures are up 72%!

2. First-time homebuyers are priced out of the market: The real estate market is a pyramid and the bottom is crumbling

3. The psychology of the market has changed, so now people are afraid that the bubble will burst: the mania for real estate is over!

The first reason the housing bubble is bursting is rising interest rates. Under Alan Greenspan, interest rates were at record lows from June 2003 to June 2004. These low interest rates allowed people to buy houses that were more expensive than they could normally afford but at the same monthly cost, essentially creating “free money”. However, the time for low interest rates is over as interest rates have been rising and will continue to rise further. Interest rates must rise to combat inflation, partly because of the high costs of gasoline and food. Higher interest rates make home ownership more expensive, reducing the value of existing homes.

Higher interest rates are also affecting people who bought adjustable rate mortgages (ARMs). Adjustable mortgages have very low interest rates and low monthly payments for the first two to three years, but then the low interest rate disappears and the monthly mortgage payment increases dramatically. As a result of the adjustable rate mortgage resets, foreclosures in the first quarter of 2006 increased 72% over the first quarter of 2005.

The foreclosure situation will only get worse as interest rates continue to rise and more adjustable mortgage payments adjust for a higher interest rate and higher mortgage payment. Moody’s stated that 25% of all outstanding mortgages will be reset in interest rate during 2006 and 2007. That’s $2 trillion of US mortgage debt! When the payments increase, it will be a big hit in the pocket. A study by one of the nation’s largest title insurers found that 1.4 million households will face a payment increase of 50% or more once the introductory payment period ends.

The second reason the housing bubble is bursting is that new home buyers are no longer able to buy homes due to higher prices and higher interest rates. The real estate market is basically a pyramid scheme and as long as the number of buyers grows, all is well. As first-time homebuyers buy a home at the bottom of the pyramid, the new money from that $100,000.00 home moves up the pyramid to the seller and buyer of a $1,000,000.00 home. as people sell a home and buy a more expensive home. . This double-edged sword of high home prices and higher interest rates has driven many new buyers out of the market, and now we are beginning to feel the effects in the broader housing market. Sales are slowing and inventories of homes available for sale are increasing rapidly. The latest housing market report showed that new home sales fell 10.5% in February 2006. This is the biggest monthly drop in nine years.

The third reason the housing bubble is bursting is that the psychology of the housing market has changed. Over the last five years, the real estate market has increased dramatically and if you bought real estate, chances are you made money. This positive return for so many investors pushed the market higher as more people saw this and decided to invest in real estate as well before they got “lost.”

The psychology of any bubble market, whether we are talking about the stock market or the real estate market, is known as “herd mentality” where everyone follows the herd. This herd mentality is at the heart of any bubble and has occurred numerous times in the past, including during the US stock market bubble of the late 1990s, the Japanese housing bubble of the 1980s and even since the US railroad bubble of the 1870s. The herd mentality had completely taken over the real estate market until recently.

The bubble continues to rise as long as there is a “major fool” to buy at a higher price. As there are fewer and fewer “older jerks” available or willing to buy houses, the mania dies down. When the hysteria wears off, the excess inventory that was built up during the boom times causes prices to plummet. This is true of the three historical bubbles mentioned above and many other historical examples. It is also important to note that when these three historical bubbles burst, the US entered a recession.

With the change in mindset associated with the real estate market, investors and speculators are afraid to stick with real estate that will lose money. As a result, they are not only buying less real estate, but they are also selling their investment properties. This is bringing a large number of available homes for sale to the market at the same time that record new home construction floods the market. These two forces of increasing supply, the increasing supply of existing homes for sale along with the increasing supply of new homes for sale will further exacerbate the problem and drive down all home values.

A recent survey showed that 7 out of 10 people think the real estate bubble will burst before April 2007. This shift in market psychology from ‘must own real estate at all costs’ to a healthy concern that real estate are overvalued is causing the end of the housing market boom.

The aftershock of the bubble burst will be enormous and will have a tremendous impact on the global economy. Billionaire investor George Soros has said that in 2007 the United States will enter a recession and I agree with him. I think we will be in a recession because as the housing bubble bursts, jobs will be lost, Americans will no longer be able to get money out of their homes, and the entire economy will slow down drastically, leading to recession.

In conclusion, the three reasons the housing bubble is bursting are higher interest rates; first-time buyers are put out of the market; and the psychology of the real estate market is changing. The recently released eBook “How to Thrive in the Changing Real Estate Market. Protect Yourself from the Bubble Now!” discuss these items in more detail.