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The Great American Housing Bubble - Fantasy or Reality?
By The Mortgage Guy / MortgageLoanRequest.com
Economic trends come and go, and it sometimes
takes years to gain a historical perspective and make accurate comparisons.
But it appears that what is occurring right now across many regions of
America just might become the housing and mortgage equivalent to the dot.com
crisis we witnessed just a few years ago.
Due to the ever-rising costs of purchasing a home, many homeowners have
decided to take advantage of the equity that has accrued in their homes
by taking out HELOCS, Home Equity Lines Of Credit. They are using these
funds to purchase second homes, recreational vehicles, extravagant wedding
receptions, and to fund remodeling projects.
This type of deficit spending is far-reaching; it goes all the way from
Walla Walla to Washington, D.C. The Fed is in debt to the tune of seven-plus
trillion dollars, and that debt is growing at the alarming rate of 1.70-plus
billion dollars every day. The total accumulation of national debt has
reached such proportions that the people at the Fed really have no idea
how to reel it in. Sooner, rather than later, rates will begin to rise
again and the bubble will burst, leaving many homeowners unable to cover
their mortgage payments, and forcing them to default on their loans. Further,
such a bullish housing market has boosted local governments' coffers and
economies through increased construction-related payrolls, property taxes,
and overall consumer spending that is tied to the newfound higher equity
in people's homes. What will they do when these revenues become leaner?
In the meantime, many lower- and middle-income people have been priced
out of the more desirable or rapidly growing markets; the overall cost
of living makes it harder for companies to attract employees to these
high-priced areas; and consumer debt on the whole is escalating into the
stratosphere. Mortgage loan interest rates are now at such an historical
low point, it is only a matter of time before they start their climb back
to where they were before-or an even higher mark. This creates a bearish
market on housing prices, which in turn causes monthly mortgage payments
to soar. Jut like a bear in the wild, the bear market will always return
to its cave for a long needed hibernation, rest, and recuperation.
In order for this bubble not to burst, the cost of housing needs to level
off, or to drop a bit and become more affordable to those seeking homes,
thus stabilizing the market as a whole. This will allow for the number
of people purchasing homes to remain constant or grow.
But this scenario seems unlikely to happen. Incomes are not increasing
at the same rate as housing prices, and people are starting to feel the
crunch. Those who can afford to buy new homes are in a buying frenzy.
Seeing themselves as savvy investors, they are all jumping on the home
investment market bandwagon, which is frustrating matters to an even greater
degree. The laws of supply and demand have out-stripped the marketplace,
and capitalism being what it is, there seems to be no letting up on the
part of the buying public affluent enough to participate.
If you couple this rampant investment trend in housing with other aspects
and sectors of the economy that are co-dependent on it, the ramifications
of the housing bubble bursting will be far-reaching. Banks, construction,
and home supply businesses, to name just a few, are totally dependent
on the housing market for their growth and stability. If the acquisition
of homes drops off, these other sectors will also see a decrease.
The fact that the housing industry accounts for approximately twenty-five
percent of the nation's economy overall is just one more reason for the
folks at the Fed to worry. They have started to study a set of newly proposed
guidelines for mortgage lenders that will help to curtail "interest
only" mortgages and even the traditional ARMs (Adjustable Rate Mortgage),
because they allow borrowers to get even larger mortgages than before.
It's just a matter of simple math and common sense to see that a bump
in the economy is just up the road a piece. 2004 saw a national surge
of ten percent in housing prices, and in some of the more desirable markets,
as much as twenty-five percent.
Another factor of serious portent is that if the housing market were
to subside by ten or twenty percent, which it appears to be on the brink
of, the stock market will, as it has historically done, reflect double
that: a dip of twenty to forty percent, causing not only a bursting of
the housing market bubble, but the stock and bond markets as well.
Even Federal Reserve Chairman Alan Greenspan, who has always tended to
take a positive outlook toward the increase in home purchase pricing,
now feels that lower interest rates and home buying need to be curtailed
in order for the housing market and our economy to continue to be healthy
and vibrant. Americans' equity in their homes is now well over nine trillion
dollars, a thirteen percent increase over last year. The bubble may not
have burst yet, but the increase in housing costs is starting to fall
short of overall inflation.
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