Posted on 08/24/2005 3:40:56 PM PDT by ex-Texan
Are home values floating merrily upward in a bubble that's about to burst? Many of the economists who correctly predicted the bursting of the stock market bubble, including Yale University's Robert Shiller, think so.
If the housing market should collapse as the stock market did, the impact could be even more painful, warns Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.
For one thing, Bartlett says, homeowners are much more leveraged than they used to be.
According to the Federal Reserve, home equity has fallen to 56.3 percent of their real estate from 75 percent a generation ago. Another Federal Reserve study found that 16 percent of the money taken out in refinancings was simply consumed.
According to Freddie Mac, people are taking more and more money out of their homes. Cash-out refinancings have risen to 18.1 percent of all refinancings from 7.2 percent in 2003. In the last four years, homeowners have taken $559 billion in equity out of their homes.
More and more homeowners are buying and refinancing with unconventional loans, such as adjustable rate and interest-only mortgages, rather than traditional fixed mortgages.
These loans offer low initial payments, but will rise automatically when interest rates rise, putting homeowners in a potential bind. The Federal Reserve says that 47 percent of all residential mortgages by dollar volume are now non-traditional.
Economist John Makin of the American Enterprise Institute notes that housing has a powerful effect on economic growth through construction, employment, purchases of durable goods like refrigerators and in other ways.
He estimates that if home prices simply level off and stop rising, it will cut 1 percent off the real gross domestic product growth rate.
Mortgage Bankers Fret Over "Creative Loans"
How much of the money has already been spent on stock market investments? I would estimate at least 40%. If that is the case, the U.S. stock markets are probably being buoyed by cash borrowed out of peoples' homes. E.g. Assuming these figures are correct -- that means 56% of the cash is either tied up in depreciating assets and/ or placed at risk in the stock market.
Home loans were not meant to finance stock market investments. Brokerage houses are required to closely monitor leveraged accounts. This housing bubble may have hidden the more obvious risks from the SEC. But, in reality, the risks may still be there bigger than ever before.
Which means this: If higher oil prices cause the stock market to stumble, it may impact real estate prices even more than has been predicted. Also, if the housing bubble bursts, people can be expected to sell their stock. Adverse consequences abound. Read More About Bubbles?
Get ready for the roller coaster ride of the Century!
You can take that and add it on top of the fact that Americans save little and our economy is consumer driven by consumer dept, leaving most people 90 days from bankruptcy and you have a pretty good recipe for financial disaster.
And even worse, those who will need to file bankruptcy to try and hang onto their overpriced shacks, will be unable to...thanks to the new so-called "reform" act. Which imposed artificial limits on who can file and what they can legitimately claim as their cost of living. Brought to you by not even the BLS...but the IRS....
Right you are! Also, The Bankruptcy Act no longer protects people from their paying loan obligations on ARM or interest only loans. Making more foreclosures a certainty.
After foreclosure, people will be obliged to pay and pay.
It would be nice to be able to buy a rental house for a price that is a reasonable and traditional multiple of the rental income. These days, in places where there is a bubble, the rental rates have not kept pace with the purchase prices. Many investors are building little empires of overpriced rental houses that bring in too little rent.
To be honest, I know that I am not someone who would want to own rental real estate. It is hard enough to maintain one home to a reasonable standard. But there could be some bargains out there in a few years for people who are interested in building a real estate investment portfolio.
It's scary.
"Economists Worry About Housing Bubble"
Most economists don't make enough to own a house, so they should relax.
Of course, you are being sarcastic, right? Most economists are very highly paid. Back when I was working on my MBA the professors in the Economics Department were making more money doing consulting than they were teaching. One guy made a small fortune advising countries in South America. Plus, all the free travel and living high on the hog. Today if you have a economics degree you can pretty much write your own ticket.
Most go with discount online brokers. Mine is $5 a trade and they almost never call me. :-)
actually Bruce Bartlett is usually very pessimistic in his economic analysis.
if home loans were supporting the stock market, the DOW would be at 15,000 by now
the fact the DOW is nearly 10% lower today than in Jan 2000, kinda pops your bubble
the fact the DOW is nearly 10% lower today than in Jan 2000, kinda pops your bubble
If you believe the above, then the inverse could also be true. If not for the home equity loans, the DOW would be at 6,000.....
See how that works...
First of all, Robert Shiller is a pathetic winy liberal hack, nothing more.
the housing market should collapse as the stock market did, the impact could be even more painful
This is absolutely the silliest statement I've read in some time - people can't sell their houses all at one time like they could their worthless dot coms - first of all, people can't / wouldn't (they need a place to live).
But how much of that money was put into the stock market?
the stats over the past couple years have been very little - next to none.
How much of the money has already been spent on stock market investments? I would estimate at least 40%.
Now this is the height of absurdity - making it up as you go along! ROFLMAO!
I'll stop there ... pure conjecture just too pathetic to continue ;)
In the U.K. the regulators clamped down on home loans in 2003. The Brits have raised home loan rates five times since then. The housing bubble started leaking hot air immediately. In 2004, housing prices only went up about 18%. This year sales are down over 25%, and prices have either fallen or leveled off. Since 2004, zero percent increase in real estate prices.
If housing prices are so easy to control, why is Greenspan doing nothing? It seems you may have hit the nail on the head. Clinching my teeth now trying not to post more.
Or, to put it another way, should I stop paying off my house and take the cash out now, hoping that the bank will get stuck with the tab?
Not sure if you are being sarcastic towards me or not... I was just using someone's logic back to them...
Houses are worth as much as people are willing (and able) to pay. If the government wants to control housing prices, they only need to impose restrictions on length and type of loan. If the only type of mortgage you can get is 15 year fixed rate, the housing prices will drop because you couldn't get 5 year ARM loans to reduce your payments.
It's not in the government's interest to allow you to pay off your home too soon. They want you to work as long as possible before you die and still think you can eventually pay off the loan by age 65. If all of us paid off our homes in 15 years, we'd have less incentive to work and pay income tax.
If your equity in your home is greater than your mortgage, then you're not directly exposed to the threat of a bursting housing bubble. Leverage works for you as long as prices are rising, but it works against you when prices fall. So it comes down to your tolerance for risk, and your willingness to accept the consequences if/when leverage works against you.
OK folks, I am ignorant when it comes to the so-called housing bubble. So can somebody tell in lay terms what will happen to prices of homes if the so-called bubble pops? maybe an example? Thanks!
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