It’s a bubble because … uh … people, like, can’t afford it:
The gap between income and Massachusetts home prices is the widestsince the peak of the 1980s housing bubble, and that gap, intensifiedby rising interest rates, should cause home prices to dip later thisyear, according to an economic forecast released yesterday.
And check out the graph. If you’ve looked around the real estate market lately, and asked yourself, "Who the hell has the kind of money for places like these?" Well, the answer is: Uhhhhh… apparently not us.
Then there’s this:
Economists said yesterday that the longer prices soar, the more severethe correction is likely to be. Mark Zandi, chief economist ofEconomy.com, said the housing market, fueled by low interest rates, isbecoming increasingly speculative in many metropolitan markets,including Boston. This means buyers, instead of basing decisions onfundamentals, are betting that prices will rise, leading them tostretch their finances and take out risky, short-term mortgages thatare vulnerable to interest-rate increases
In California, for example, two-thirds of mortgages in the first threemonths of the year were interest-only adjustable rate mortgages. [emphasis mine]. Buyerspay only interest for the first few years of the mortgage, after whichrates are adjusted and principal payments begin. These mortgages meanlower initial payments, but should interest rates jump, it could makethe mortgages unaffordable for some, leading to defaults, foreclosuresales, and falling prices.
Yikes. I wish I had the ARM statistics for MA.
And Alan Greenspan got into the action, too, quaffing the froth of certain local markets … Hrm, whom could he be talking about?
And what’s it all got to do with the price of tea in China? Paul Krugman talks about China buying our debt, thereby keeping our interest rates low and propping up our housing bubble. (Can you "prop up a bubble"? Never mind.)
This pretty much gels with my personal experience with Lowell’s housing (buying and rental) market – as I said, we’re a very large investment property city, and there’s a lot for sale right now…that doesn’t seem to be moving as fast as it used to be.(OK, that was not-so-subtle blogwhoring, but who said I was perfect?) đŸ™‚
Lynne: You’re allowed, even encouraged, to push your blog here.I think that rents have not been going up much in the Boston area either, which creates a big disparity between the cost of renting and buying. That’s a good sign of a bubble, too.
I would think that a growing gap between rents (my rent in Kenmore Square has actually gone down 4% since I moved in 3 years ago) and housing prices would help a slow deflation of the bubble, instead of a sudden burst. After all, renters move slowly, due to 12 month leases. Instead of folks leaving their apartment to buy a house, they’ll rent for another year or so. Instead of folks who move into the area buying a house, they may rent for a while too. All of this should be driving up rents (or keeping them stable) while decreasing the push on home prices.In the mean time, do we have any numbers on the number of new housing units built in Boston + Cambridge, Springfield, etc. over the past 5 or 10 years? It seems to me that if the cities could get some new moderate-priced (not even “affordable”) housing, it would help to leak some air out of the bubble too.
As someone who was hoping to purchase a condo in Somerville or Cambridge, I’ve watched some amazing developments as of late. I’ve watched my friend move to Lowell and pay $200,000 for a condo on middle st. I’ve watched my roommate’s east-somerville condo appreciate by $50,000 in one year. But how can that work? I haven’t made more than 6% annual raises, so how can home prices jump by more than 10%? The worst part is, I feel like there’s literally thousands of people like me, watching, waiting for prices to fall so we can finally own our own homes. So if prices even slip a little, some of those thousands will buy, and then prices start to creep back up again. The only way a real housing bubble can pop is if people stop earning as much, which means, people like me and others are praying for the economy to tank so that we can buy a home.
In Massachusetts, 20% of new mortgages in 2004 were interest-only. Georgia tops the list at 50%, which is amazing because they’ve been sitting out the appreciation game the last few years and should know better. Bubbling California, Colorado, Nevada, and D.C. round out the top five, all with well over 40%. I’m glad our state has avoided this scourge so far.
Link: http://tinyurl.com/b47nr
Two consecutive years of flat real estate growth or less than 6%, which is about the break even point of people who bought on interest only mortgages, and one will see a cascading oversell of the properties. And this time due to high leveraging the bottom will fall off. When the blood bath stops, somewhere in the next 5 to 10 years, real estate would have given back more than 70% of its gains since the turn of this century.