Monday, July 11, 2005

Feds Finally Wary of Bubble

Originally uploaded by bizzyboy.
Martin Wolk, chief economics correspondent for MSNBC, wrote in his column today that economists who were formerly dubbed as "pessimistic cranks" for their Chicken Little speculation about a housing bubble, are now getting a bit more respect. Even though their falling-sky predictions have yet to materialize, more people are starting to worry that there might be something worth worrying about. The concerns, as mentioned here in previous posts, is that this market is not cooling. On the contrary, the prices keep rising like a sick patient growing sicker every day. Meanwhile, interest-only loans, and other such worrisome loan products, have prompted Joe and Mary Sixpack to mortgage themselves to the eyeballs on the expectation that their home values will increase substantially in a matter of months, allowing them to refiance. If that doesn't happen, and if interest rates rise on top of it, the Sixpacks could be headed toward foreclosure, bankruptcy, or both. Wolk's column has several bulleted items of concern. They are:
In California, the median price for an existing home has surged past $500,000 to the current $523,000, double the $262,000 median of just four years ago. In the hottest markets near the California coast, where two-bedroom cottages often go for more than $600,000, the asking price is often little more than a starting point for a bidding war. Nationally, home prices rose 12.5 percent over the past year, according to the most reliable federal figures.

A study by the National Association of Realtors found that more than 35 percent of all home sales were for investment purposes or as second homes. And even with fixed mortgage rates near 40-year lows, more than one-third of borrowers took out adjustable-rate mortgages last year.

Ten states and the District of Columbia have seen prices rise more than 70 percent over the past five years, and prices have more than doubled in 23 markets in California, Florida and Massachusetts, according to federal figures. In the same time frame, ordinary consumer prices have risen just 13 percent, and personal income has risen 23 percent.

A cover story in the Economist magazine this month calls the global rise in housing prices “the biggest bubble in history” and warns of economic pain to follow. Declining prices in formerly red-hot markets of Britain and Australia offer a cautionary tale for what could happen in the United States, the magazine's editors argue.

In the final analysis, the wise money appears to be on the approach of a cooling off period, if not a drop in prices. Regardless, either one is going to spell disaster for many people who have dived into this market from an interest-only platform in the past few months.