Thursday, October 13, 2005

An Ill Wind Is About To Blow

So much is about to change, and not much of it is good.

Of the most interest to readers who happen upon this blog, the bubble will pop. That seems certain now, and it's only underscored by stories like the one today in the Associated Press, a piece on mortgage rates out of New York by reporter Aleksandrs Rozens. The increase in mortgage rates above 6 percent is going to slow demand for housing, and it's my guess that it will also send prices tumbling for a correction.

Other things will change, too.

Foreclosures are going to go up.

Home improvements are going to drop off, including the do-it-yourselfers — attention stockholders in Home Depot.

A lot of the wannabe real estate agents who got themselves a license in the past two years, hoping to surf the 6-percent-commission wave to retirement, are going to have to get real jobs again. Only the seasoned pros will be able to make it in the coming market.

Hard times are on the way too for those who bought homes and stretched their dollars thinly in the hopes of refinancing once they got a bit of that 10-percent-plus annual appreciation in equity. The equity isn't going to come. The refinancing isn't going to be a bailout. And a lot of people are going to be driving the same cars they are now 15 years from now because they just can't afford to do otherwise.

The list goes on and on. There will be a domino effect down the entire housing foodchain. And even if you didn't buy a home in the past couple years, you're going to feel it. Downturns like this have a way of turning people into penny pinchers, which hurts the stock market, the economy and everyone in between.

Things look bleak for this Christmas season.

Here's an except from the AP story on mortgage rates out of New York:

Americans may have seen the last of long-term mortgage rates below 6 percent, and borrowing costs for home buyers likely will climb further, slowing frenetic demand that has stoked U.S. housing in recent years.
Realtors have spotted a drop in the appetite for housing in recent months, and a survey of lenders from Freddie Mac on Thursday found that rates for 30-year mortgages – a popular home loan – have crested 6 percent for the first time since March.

"The most likely pattern is for mortgage rates to gradually rise over time. It is likely that they'll hover at 6 percent or just a bit over," said Frank Nothaft, chief economist at Freddie Mac. He added that "will translate into somewhat weaker demand for housing, lower home sales volume and lower house price growth."

Douglas Duncan, chief economist at the Mortgage Bankers Association, an industry trade group said that "because of increased concerns about inflationary pressures, it will stay above 6 percent."

In raising interest rates last month, Federal Reserve policy makers expressed their concerns about inflation. And earlier this week, meeting minutes from those Fed officials hinted at more interest rate increases.

These concerns have been noticed in the broader financial markets, especially the U.S. Treasury securities market where interest rates have risen, tugging mortgage rates with them.

According to Freddie Mac, the U.S. housing agency which sells guarantees for home loans, this week's 6.03 percent for 30-year mortgages is the second highest level of the year. Thirty-year rates were at 6.04 percent in the March 31 week.

This week is also the third time this year mortgage rates are above 6 percent – an important psychological level. When rates were below 6 percent, this helped spur home buying and refinancings of home loans that allowed Americans to spend their way out of the most recent economic downturn.

The low mortgage rates have supported consumer spending on goods and services – which accounts two-thirds of the nation's gross domestic product – because low borrowing costs allowed home owners to draw money from properties that had appreciated in value.
The entire AP story is at this link.

— The Boy in the Big Housing Bubble