Tuesday, June 21, 2005

And then there was blog


In the coming months I will be posting my thoughts, concerns, frustrations and observations about the housing market. It's my hope that some of the information you will find here — the links and the data — will prove helpful in your own quest for homeownership. I'm not sure it's going to help any of us be able to afford to buy a house in this market, but who knows. Somebody's buying them and helping to push the prices up. Although the debate about whether we're in the midst of a bubble has been going on for more than two years, one thing is certain. No market can sustain this kind of growth forever. How can it possibly? And so a story in The Economistraises the question yet again: IS THE HOUSING BUBBLE ABOUT TO BUST?

The story says:
"The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops. NEVER before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stockmarket bubble burst in 2000. What if the housing boom now turns to bust?"

That same piece goes on to make many interesting observations, including one about who's buying the houses:
A study by the National Association of Realtors (NAR) found that 23% of all American houses bought in 2004 were for investment, not owner-occupation. Another 13% were bought as second homes. Investors are prepared to buy houses they will rent out at a loss, just because they think prices will keep rising—the very definition of a financial bubble."

Those who have yet to be able to afford a ticket into the housing market watch in awe as their peers continue to jump feet first into the fray, financial futures be damned. They borrow the down payment, arrange for interest-only payments, and bet everything on the possibility that prices will rise. Their hopes are that, in a matter of a few years, the value of their home will exceed what they borrowed to pay for it. This difference is called equity, and it can save the day in such a situation. Mortgages can be refinanced and payments can be lowered. But what happens if that equity doesn't materialize? What if prices level off for a long time? What if the conventional wisdom suddenly says "rent for awhile," and the soaring prices stop? Right now the "F" word is "financing," but very soon it could be "foreclosures."
Market Watch quotes Ethan Harris, chief U.S. economist at Lehman Brothers, as saying that the buying spree and and climbing prices could soon be brought to an end by nervous wannabe buyers. It's a notion that's becoming more popular as newspapers across the country report with greater frequency stories like that which appeared in the Whittier Daily News on June 9, 2005. That story said:
"The percentage of Los Angeles County households able to buy the area's median-priced home sank even lower in April, as housing prices across the county continued to soar.

Just 16 percent of households could afford the median-priced home of $485,900, according to a report Thursday by the California Association of Realtors.

"Known as the affordability index, it was the rate's first movement after holding at 17 percent for 10 consecutive months. The index declined from a rate of 20 percent in April 2004."

It's not going to be pretty.