Real Estate & Mortgage Insights

The End of Irrational Exuberance

We are returning to a more balanced market between home buyers and sellers," according to David Lareah, chief economist for the National Association of Realtors.

His statement was based on a slight downturn in the annualized sales pace of existing homes, plus a variety of other factors, including increased home inventory levels.

More homes for sale, less demand.

Because of low rates, easy mortgage qualifying, low down payment loans, and heavy buyer demand, experts like June Fletcher, "Home Front" reporter for the Wall Street Journal (and others) feel that a "herd mentality" has developed in recent years.

Homeowners and investors have come to expect rapid price appreciation. Investors and speculators have jumped into the market at four times their normal participation, further feeding the frenzy.

Fletcher's just-published book, House Poor, deals with strategies on how to handle the transition from the recent seller's market to the market of the near future.

Some have called the recent market a "housing bubble." You've seen the reports in recent months all over the media. "The 'Housing Bubble' is about to pop!"

Others have likened the recent market to a balloon that may develop a slow leak, and some have said, "What housing bubble?"

David Lareah says, "We feel confident that housing is landing softly as rates continue to rise."

A soft landing is important, not only for homeowners, but for the economy as a whole. Although the economy has done well in recent years, most of that growth has been due to consumer spending. Since job growth and income growth don't completely explain the strength of consumer spending, there must be something else.

Equity growth.

And borrowing.

So if there is a "hard crash" in housing, if the bubble actually bursts, or if the balloon leaks too much, a lot of homeowners and investors could be in trouble because they will have less equity. Or no equity.

Which means less borrowing, less spending, but still...a huge debt load.

Because of easy-qualifying and the abundance of adjustable rate mortgages based on indexes tied to short-term interest rates, some homeowners may have problems making their monthly payments.

The Fed has hiked short-term rates three percent since June 1, 2004. ARMs have risen (approximately) the same amount, unless the rate adjustments have been limited by interest rate or payment caps. Even in that case, it is only a matter of time before payments on those loans will increase.

Luckily (or perhaps by design), the Fed has "hinted" that rate hikes may be near an end. That "hint" means there are probably three more rate hikes before they stop - at a quarter percent each. One bump on December 13, one on January 31, and one in March after Ben Bernanke takes over the Fed chairmanship from Alan Greenspan.

No one wants a "hard crash" in housing because that would crimp consumer spending just when businesses are increasing their capital spending and investment in the future. If consumer spending slows, businesses will put off their spending and investments, further weakening the economy.

All the bigshots are hoping for a soft landing.

So...where have fixed rates been in all this?

On June 1, 2004, when the Fed began their gradual three percent rate hike, Freddie Mac reported the average 30-year fixed rate on a new loan was 6.28%.

On November 23, 2005 -- it was 6.28%.

Now that's interesting.

(June Fletcher's book is called "House Poor - Pumped-Up Prices, Rising Rates, and Mortgages on Steroids." A subtitle on the covers says, "How to Survive the Coming Housing Crisis."

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