Is A Housing Bubble About To Burst?

[Frodo]

http://biz.yahoo.com/bizwk/040709/b3892064mz011_1.html

Disclaimer - I happen not to believe that there is a real estate "bubble" waiting to pop (absent some incredibly unlikely circumstances), but the article is interesting.

A few excerpts.

It may not be long before the Stewarts -- and other recent home buyers paying exorbitant sums around the country -- wish they had paid attention to their cold feet. After an amazing four-year boom in residential real estate, the housing market could finally be topping out and heading for a downturn. The culprit: rising interest rates. House prices could flatten on a national level in the next year or so while taking a spill in overheated coastal markets. A downturn in housing would squeeze recent buyers who overleveraged themselves to pay top prices -- and risk slowing the entire economy by cooling consumer spending as well as housing construction, lending, and the real estate business.


It's always tricky to call the top of an overheated market, and the pessimists have been wrong before. Optimists argue that even if there is a correction, most homes will remain far more valuable than they were a few years ago. And they say immigration, second-home purchases, and boomers' inheritances will support housing. Says Angelo R. Mozilo, chairman and CEO of mortgage lender Countrywide Financial Corp. (NYSE:CFC - News): "I think (the market) will continue to rise."

But this time something important is different: Interest rates are inching up. It was the Federal Reserve-engineered decline in rates that inflated the housing bubble. But starting with a quarter-point increase in the funds rate on June 30, the Fed has begun what promises to be a prolonged tightening cycle. Even if the Fed's hikes are measured, higher mortgage rates will inevitably make houses less affordable. If 30-year fixed-rate mortgages rise just one percentage point, to 7.2% from their current 6.2% -- well within the range of forecasts -- house prices would have to fall 11% to keep new buyers' monthly mortgage payments from rising. If fixed rates went to 8%, prices would need to fall 20% to keep payments level.


more...

[papau]

1. Only coast folks have a "bubble" - and their price rise will slow - not

reverse.

The 20% drop to get equiv monthly payments is however true for 8% mort rate - but until we get true growth well above 3% in GDP that should not be a problem.

Of course the weak dollar could cause a bit of inflation - but the effect will be a slower rise in price - not a bubble burst.

The military spending is not as effective as other gov spending in stimulating the economy - so I do not worry about that type of problem

I do worry about lousy real returns on new capital investment - meaning commercial real estate may be in for a bit of a drop.

[Frodo]

2. I agree.

The couple mentioned in the story had to pay 55% of their monthly income (OUTRAGEOUS for a mortgage lender to even make that loan - if true - believe me, I know) to be able to aford a modest home in CA area. The DC area (where I recently sold a home) is also a bit out of control (but not as bad).

Those areas could easily see a decline in home prices. There's simply no one to BUY that $730,000 "starter" home when it requires 60% or 65% of income.

But nationwide, I don't expect a problem. Even at 8% (which will take a while) the monthly payments are not out of reach. The article listed median income of $55,000 and median home prices in the $185,000 range. At 8% that isn't a problem at all - even by traditional qualifying standards. In fact, the CA story makes my point for me (from a different thread). People who HAVE to have SOMEWHERE to live will spend what it takes - until it can't be done any more (I would have expected 55% to be past that point, but perhaps that's "takehome pay" and not gross - even then it's pretty far out).
As the population increases it FORCES demand on housing. It doesn't have to be 7% annual increases, but it will take a huge problem before it results in 20% declines (outside of those monster areas).

I expect a couple years of "blah" nothingness and then an annual 1-3% climb for the next few years. I'm hoping to do better here in NC since the local market has actually been stagnant for the last three years (-1% to +1%) and the jobs here are finally coming back (and word of a possible Dell plant here adding 3,000 jobs is encouraging).

[Digit]

5. Um, global warming

Global warming and the realization that the coastline might be a-changing could have an effect.

[displacedtexan]

3. Here's what my friends are worried about...

Here in Baltimore, the rowhouse renovation bug bit several people I know. They got home equity loans (variable interest rates), bought pricey fixer-uppers (again with low variable interest rates), and renovated them to sell.

Unfortunately, lots of other people did the same thing, so there's sort of a glut of renovated row houses right now on the market for $200K-$600K (or for rent).

As interest rates rise, and these houses remain unsold... or even unrented, the monthly cost to the owner/renovator continues to rise, as well.

Lots of people stand to lose everything if interest rates keep rising.

I would imagine that people across the country who took out those home equity loans are also worried about the monthly cost increases, too.

[seasat]

4. My main concern is about manufacturing related to housing.

A lot of the jobs in the recent job reports are related to construction of new housing. There have been increases in finance, construction, and manufacturing of construction materials in recent reports. The lower interest rates and growth may have spurred enough to spill over into other industries but I worry that a decline in housing purchases and higher interest rate will result in a further contraction in jobs. I don't see it as the bubble directly affecting the homeowners but affecting the sluggish recovery if the current small growth hasn't enough momentum.

[ramapo]

6. How can it not burst?

I am amazed at every day that goes by that this housing market is supported and am even more stunned that people can afford (or appear to afford) the outrageous prices. Housing, and the debt bubble beneath it, are out of control.

Yes I live in North Jersey, so I guess I fall into the "on one of the coasts" category but an awful lot of people live on the coasts (isn't that the problem?). Houses in my neighborhood now sell from $450K-$550K+. These are modest houses, some barely improved over the past 20 years when the same house sold in the low $100s or less.

The million dollar house is now nothing out of the ordinary. How about the $700K knockdown?

Of course you could get really crazy and look for a home at the Jersey shore where anything close enough to smell salt air is in the mid-to-high six figures (and I do mean anything).

Sure you could move out to Nebraska and probably find a very affordable home but there's perhaps a little problem finding work.

Correspondingly rents have increased also so $1000/mth is cheap.

It is hilarious to hear the financial pundits talk about low inflation as we've watched housing costs rise year after year. Never mind medical costs.

The conventional wisdom seems to be that the sky is the limit for such essentials as housing, insurance, and even your vehicle. How absurd is it that you can easily spend $40-60K on a car?

How do we pay for all of this? Funny money and the credit card, backed by the make-believe faith and credit of the US govt, which is actually on loan from central banks and investors throughout the world.

This cannot continue indefinitely.

[Frodo]

7. It really depends on where you live

I recently moved from an area that is similarly out of control.

But were talking about a nation-wide "bubble" here. And there just doesn't seem to be any evidence of it. The NAR reports that the median single-family home price is still well within reach of the median household income. Rates will have to go up substantially without the employment picture improving for nationwide home prices to fall. And it would take a major catastrophy to have the type of price drops that would indicate a "bursting bubble".

There amy be localized bubbles in the real estate market, but that has always been the case. They're based on local conditions that can change. Here in Winston-Salem, there's talk of Dell opening a plant here and adding a few thousand jobs (plus the suppliers and support tat come along with it). That kind of local occurence can have a dramatic impact on real estate prices, but not every town is vying for Dell.