If the formerly red-hot real estate market really tanks, it could drag the entire economy and stock market down with it. The Federal Reserve may even have to lower interest rates if the housing market crumbles in an effort to try to let the air out of the bubble slowly.
In an article for FOX News, MAXfunds co-founder Jonas Ferris focuses in on the core problem in the lending market. Surprise, its not predatory lenders.
Now that the real estate market has stopped its meteoric rise, the questionable loan practices and buyers' logic that was once the foundation of the late stages of the boom is starting to crack. Double-digit home price gains year-after-year hid a whole bunch of mistakes.
Home buyers and lenders were both duped into the belief that home prices always go up, so putting very little money down and "buying as much home as you could possibly afford" is always a sound investment strategy, regardless of the entry price."
Your mutual fund portfolio could take a hit when home prices fall. While most of the damage would be to real estate sector funds that invest in companies that could see their businesses sink if a glut of foreclosed homes hit the market – funds like Fidelity Real Estate Investors (FRESX), Third Avenue Real Estate Value (TAREX), T. Rowe Price Real Estate Fund (TRREX), American Century Real Estate Inv (REACX) - mutual funds that only own REITs (Real Estate Investment Trusts – primarily companies that operate properties for rental income) like Vanguard REIT Index (VGSIX) would also suffer.
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