Sponsors

The Real Estate Bubble is Real and Bursting Email Print

By Tom Ball
04/19/2006 02:46:49 PM EST

As with most economic issues of national and global significance, their percussive consequences are rarely felt in most people's pockets until months or even years after an event has unfolded. Often, the possibility of such negative personal effects are denied or rationalized until all is lost and past inaction is regretted.

Such is the case with the hotly debated U.S. real estate 'bubble'. Does it exist or does it not?

Should we care?

Those who care will be determined by each person's respective positions in the market as well as his or her associated [in]tolerance level for market volatility.

That said, there would be some elements of the housing boom and bust that clearly affect us all. For example, about 25% of all jobs created since 2001 have been either the direct or indirect result of the housing boom. These include jobs in construction, real estate and mortgage finance.

What happens to these jobs if the boom goes bust?

Also affecting everybody is the potential for an overwhelming loss of national wealth. Though for many, the rather ambiguous concept of 'home equity' sits only peripherally on their household balance sheet, it generally accounts for the majority of a family's total wealth.

A significant reduction in this asset would inevitably inhibit a family's propensity to spend their disposable income as freely as they had in the past. This is true regardless of whether or not the homeowner had considered 'cashing in' on their property's inflated value. This negative effect would likely be augmented for those hoping to realize their home's equity either through a home equity loan or through selling the property.

Most at risk are those who recently (within the last two years) purchased their homes with little (less than 10%) or nothing down and those who purchased using 'exotic mortgages' (interest-only, negative amortization ARM's, etc.). Most of these types of purchases were executed with speculative intent, hoping the bubble would continue to grow so they could sell the homes at a hefty capital gain.

Now home prices are deflating as the supply of homes available for sale increases and the cost of financing a purchase balloons. This is creating an expansion of those homeowners who "are 'upside-down' -- owing more on their homes than they're worth. Many of these homeowners may soon face a "can't pay, can't sell, can't refi" situation that could lead them to lose their homes."

But that's just the beginning. For a behind-the-scenes look, consider some of the more shocking statistics recently noted by Bloomberg and MSN's MoneyCentral:

  • Nearly 10% of households with a mortgage had zero or negative equity in their homes as of September 2005.
  • 5% of home borrowers was 'upside-down' by 10% or more.
  • The situation is even grimmer for recent borrowers. Of those who bought or refinanced homes in 2005, 29% had zero or negative equity, and 15.2% were underwater by 10% or more.
  • Interest rates on about a quarter of all mortgage loans outstanding, or $2 trillion, are scheduled to reset this year and next, according to Economy.com. Homeowners who opted for extremely low teaser rates in recent years could see their payments eventually double.
  • Defaults and foreclosures are already on the rise, thanks in part to higher interest rates, cooling real-estate markets and overextended borrowers. Nationally, 117,259 properties entered some stage of foreclosure in February, up 68% from February 2005.
  • 43 percent of first-time home buyers made no down payment last year, according to a study by First American Corp. 43%!!!
  • 22 percent of the borrowers with initial interest payments of 2.5 percent or less have negative equity in their homes (the market value is less than the size of the loan); 40 percent have less than 10 percent equity.

    And finally:

    Any homeowner with negative equity is at risk of foreclosure if hit with a job loss, divorce, death or other catastrophic event. But homeowners with no equity and adjustable-rate mortgages face additional risks from the loans themselves, since their payments could rise 50% or more in coming years as interest rates reset to higher levels.

    [...]

    A 1% teaser rate on a $300,000 mortgage that rose to a market rate of 6%, for example, would increase a family's monthly payment by 86%, from $965 to $1,799 a month. If the old payment represented 30% of a family's gross income, the new payment would represent over 55% -- a squeeze that few families could endure for long [...].

    Big upticks in foreclosures have repercussions that extend beyond the families that lose their homes. Lenders that wind up with too many foreclosed properties may cut prices by up to 20% to sell the houses quickly, which can depress house values in surrounding neighborhoods.

    [...]

    Dropping home values put even more borrowers underwater. If home prices nationally were to fall by 10%, ...nearly half of last year's borrowers and 17.7% of borrowers overall would owe more on their homes than they're worth.


    • KEYWORDS: ,

    Sign up for a Complimentary Member Account... Join the community! It's fast. And it'll allow you to take advantage of all this site's great features!

    Related Articles

    Disclaimer: "Related Articles" are provided as a service to our readers (Via Google News Feeds created using this article's 'Keywords' as the search terms to generate the feed). It is important to note that if a "Related Articles" list is included with this story, the list will be updated frequently subsequent to the posting of this story and may thus contain articles with information not yet known at the time of this story's original publication.

    < So... where are all the Jews? | Luskin Confirms Rove a 'Subject' of Plamegate Investigation >
     Display:
    The Real Estate Bubble is Real and Bursting | 0 comments ( topical, editorial, 0 hidden)
     Display: