No More ‘Multiple Bidders’

A story by Knight Ridder New Service reporter William Sluis:

CHICAGO - The nation's long housing boom will end not with a bang, but with a prolonged whimper as homeowners suffer through stagnant pricing that could last years.

That was the consensus of economists gathered in Chicago to consider whether a so-called housing bubble will end in a crash. Their say it won't.

But homeowners will no longer be able to use houses as piggy banks, periodically cashing in on gains in appreciation through low-cost refinancings. Many also will have to keep a house or condominium for a long time until prices rise.

The problem is that rising mortgage rates are putting an end to the easy money that underpinned increasing home prices, said Richard Brown, chief economist of the Federal Deposit Insurance Corp. in Washington.

"Price increases have far outstripped income growth for a long time, particularly in the last two years, but that period is coming to an end," he said.

The "golden age" for mortgage lending is nearly over after lasting about 20 years, he said.

"The end of the boom probably is not far away," Brown said. "It likely will lead to a long period of price stagnation but not technically a bust."

House prices have been artificially boosted recently by the lowest mortgage rates in three decades, and high-risk lending has driven up home-price inflation, Brown said.

Such lending involves interest-only mortgages or those that allow the buyer to set his own monthly payments, without paying off principal.

Home prices "have been rising far more rapidly than rents for the last four years. This probably is what Federal Reserve Chairman Alan Greenspan meant when he pointed to froth in the housing market," said economist Richard Rosen of the Federal Reserve Bank of Chicago.

Rosen said a huge drop in long-term mortgage rates since 1985, when they were around 12 percent, to a recent rate near 5 percent "meant that you could afford more house for the same monthly payment."

Rosen compared the United States with Britain, where mortgage rates have been rising for about two years.

Here, the uptick in rates began later.

"In Britain, if housing was a bubble, it didn't burst," he said. "When mortgage rates rise, prices flatten but they may not actually decrease."

Find the rest of the story at this link.

— The Boy in the Big Housing Bubble