Nobody knows if it will crash. But the seeds are in place. Huge run up beacuse of 1% fed funds (3.5% ARMS). Record speculation and hoarding of homes as investment porperties. Loosening of mortgage rules to the extreme. 1% teaser interest only ARMS. No Doc. No questions asked. The larger bubble is in the mortgage industry. The shakeout will be brutal when it comes. Note home prices nationally are flat since June 2004. That is when the ARMS started going up from 3.5% to the current 4.15%. Early signs of bubble collapse already showing themselves in S. California and Vegas. My guess is that another 50 basis points on the ARMs will push prices negative. There just won't be the incomes to support the monthly payment on that $600,000 house in California that was just $425,000 2 1/2 years ago. If investors get spooked it will be just like VEGAS in the fall on a national level. Investor purchases in 2004 were DOUBLE that of 2003. Insane speculation with 5% downpayments. The only way disaster is averted is if home prices could somehow go sideways for 7 years and consolidate. But that just isn't the way markets work usually. Small chance. but not likely.
Some people buying homes on ARMS and interest only notes will get burned. Sure they will. They are using a finance method that will cause their payments to climb while sales cool without protecting themselves with somekind of option or hedging tool. That is definitely folly. But, all of us level headed folks have realized that rates will rise, and we're locking into fixed rates. We have plenty of time. And when rates do rise, we'll be thankful we have payments based on 5% mortgages instead of 8% mortgages, and that will create a heck of an incentive to stay in the house we have, and not sell it. My house won't be "supply" on the market when 30 year fixed notes hit 8% because my payment will be (and is) very low. If rates rose to 8%, I won't move unless I have to, even if houses do drop in value substantially. Most people won't, and the only people selling will be because of death, divorce, or knuckleheaded investors that don't hedge somehow. At the same time that this thread has been going on, the value of the dollar has been eroding. How long has the "bull market" in housing been going on? Here's a question for you. How much would it cost today, to buy any stable asset (gold, land, etc.) which cost $250,000 only a few years ago? More. Don't know how much more, but definitely much more. The price of housing in most areas of the country may...in the end...be justified solely by the much lower value of the dollar at the time that the "crash" that you're predicting is supposed to happen. If houses were *not* climbing in price rapidly, I'd be kind of surprised based on how the dollar has dropped. You say "disaster"? I say for any move, of any market, there will always be a "disaster" for people who position themselves incorrectly for that move. The rapid rise of a tech stock is a disaster for the guy shorting it. There will be some knuckleheads who get burned in California, or even on Main Street, sure. But I don't think there has ever been a point in history where the average joe on the street said, "Thank God I didn't buy a house on a fixed note back when rates were low". Or, "Thank God I didn't buy that beachfront property back when I could" "I'd much rather rent, and then buy back in when the rates are 8%". SM
Unfortunately 30%+ of people are using ARMS. And I hear its over 50% in california. Because that is only way they can afford to pay what may be an overvalued price. Crux of problem is that many first time buyers entered market over last 2 years and bought based on belief that housing prices only go one direction.
The people that bought (and continue to buy) with ARM products are doing so because of several reasons. Either the ARM rate gives them the power to not tie up their money and thus leverage their capitol to buy several investment homes, or using an ARM is the only way to actually qualify for the monthly payment for buyers of limited means. Many in my bubble area are using an ARM with an interest only option. Many buyers see the run-up in real estate as their "last train home" and are running to get aboard, no matter the cost. In my area, it is quoted that between 75-80% of all new loans are ARM. from www. piggington.com "In modern-day San Diego, on the other hand, interest rates are absolutely crucial. This is because San Diego's sky-high home prices are the result not of fundamentals, but rather of the speculative borrowing orgy that has been taking place in our fine city for the last several years. If short rates keep moving up, for instance, many buyers who were going to use ARMs (which, at last count, consisted of over 80% of new mortgages) will get knocked out of the market. And if long-term rates follow short rates up the same goes for any buyers who were going to use fixed-rate mortgages. Meanwhile all those people who bought houses with 1-year ARMs and no down payments in early 2004 will start seeing their payments skyrocket even as the market has been flat, and the first trickle will issue forth from the foreclosure floodgates. So interest rates are key in the San Diego market, and it therefore behooves us to pay close attention to where they will go."
In my trading charts are not "supplemental resources". They may not supply everything...but they supply vastly more than the press releases and analyst (!) blurbs that you are fondly quote. As far as your San Diego comments...the charts I have plastered all over this (and the other) thread show population and income are up marginally, but real estate prices up like 300% in a straight vertical line. Classic bubble, and the charts show it historically in the past as well. It ended badly back then too.
If someone "buys" a home with little or no down payment with an interest only mortgage, and then defaults later due to rising interest rates, what will they lose? Other than a smear on their credit rating, not much. People with little or no down payment and interest-only loans are just glorified renters. Rent is being paid to the note holder instead of a landlord. Seems to me the ones at risk are not the home-"owners" but the mortgage note holders.
Haven't there also been changes in capital gains taxes on real estate in the last five years? I remember when you would get burned if you sold your home and didn't buy a more expensive one. I don't understand why the housing market is not set up with controls in place to support communities of long term residents?
They are the knuckleheads I'm talking about. Now please realize, I'm not talking about the people who own houses in California who paid reasonable prices (for that location). I'm talking about the people who bought them regardless of what they paid. I don't have any negative opinions on someone who buys a stock that goes up in value to where it has a PE ratio of 200, and for it to make the dividends justifying the price, every person on earth would have to own one of that companie's widgets. I do have negative opinions on the minority of the buyers that drove it to that level under the assumption that it will move even higher...thats just bad investing...