Saturday, October 08, 2005

Housing Bubble?........Who's responsible?

Presently the Boston Housing market is changing faster then Harriet Miers job qualifications for the Supreme Court appointment. Gone are the day's of multi-offers and large potential buyers at open houses. Yes, my friends, we have begun the downward trend in the housing market. But how did this all happen so quickly? I can answer that in two words. Alan Greenspan.

Will the Boston real estate community jump for joy with the departure Mr Greenspan? Of course!

I believe not only will there be a housing bubble, I think it has the potential to be worse then in the late 80's early 90's for the Boston area. Contrary to what my esteem Boston realtors believe that this will only be a minor air leak, I believe you should cover your ears because balloons will be popping with a BANG.

First and foremost, let's seperate my opinion from the facts. These are the facts as of today:

1. According to Inside Mortgage Finance Publications in the year 2003 "creative financing loans" such as ARM, interest only, negative amortization loans ect..., only made up 26.2% of home mortgage loans. However,

2. In the second quarter of 2005 ARM and other creative financing mortgages soared to 49.1% of new home purchases but the share of conventional fixed loans dropped to 36.3%

3. According to Consumer Federation of America, "....many consumers who have alternative mortgages don't fully understand how they work"

4. A record number of individuals are cashing out their equity from their homes at an alarming rate, leaving little or no equity in their property. Basically treating thier home as it was a private ATM machine for cash.

5. A record amount of people are purchasing homes with little or no money down.

6. According to SAR Research 66% of home purchases in the first half of the year had a combined home ratios greater then 80% interest only, negative amortization.

7. Alan Greenspan's own words is a sign for worry when he commented on the current housing market by saying "......vulnerable to adverse advents"

8. Housing inventory is at an all time high, DOM (days on the market) are increasing in all areas of the country

9. Property foreclosures are on the rise due to increasing interest rates.

10. Home heating prices are on the rise and leaving home owners with less spendable cash.

So what do all these facts add up to? Basically, the Fed has single handedly created a means where people are buying homes they cannot afford and at some point in time the realities are going to set in. The Fed allowed many individuals to obtain negative amortization loans in which early payments are not enough to even cover the monthly interest of the loan, never mind the principle. The logic at the time, was as salaries increased they will be able to afford higher payments latter on. Is this not a recipe for disasater?

I can go on and on with more data but the bottom line is this: when you give away free money a bubble will happen. If you don't believe me just ask the Venture Capitalist in the Silicon Valley of California of the last bubble. Unfortunately, this is going to have a greater impact then the internet bubble because it influences a lot more people.

My concern is this, when the most recent home owners prepare to sell their homes in the next coming years, they may find out that their existing mortgage amounts owed are actually higher then what their home will be worth. In addtion, those buyers who opted for the introductory teaser rates of 1, 2 or 3% will be in shocked when they soar much higher. As a result, their monthly payments will rise hundreds if not thousands of dollars per month. Will they be able to make ends meet? One University study showed that the majority of mortgage holders with the teaser rates have only three thousand dollars in personal savings. Scary!

What is the future of the Boston housing market? Presently, interest rates are at a 6 year high and have gone up to the best of my knowledge 11 consecutive times. If the housing inventory represents the bubble (balloon) then Mr. Alan Greenspan is holding the pin to puncture the balloon as a result of him controlling the rates. Thus I will predict that once mortgage rates hit 7.5% cover your ears. However, if the mortgage rates remain below 7.5% I feel the outcome will be a slow but steady decline in home prices with an overall adjustment downward of 2-3% by the end of 2005. If the present economic climate continues, the downward spiral will then proceed into followng year of 2006. I predict that the fall in prices will level off at 8-12% of today's highs. Of course, if we have a terrorist attact or more natural disasters then all bets are off and the outcome may be much worse. I just don't see how this market can sustain itself if individual take home pay remains flat or only increases by 2 or 3% a year coupled with the current pace of inflation in heating oil and other utilities. At some point in time, which I feel has already occured, the Boston housing market will out price itself. I also feel that the Fed will have no other choice but to tightend up lending practices or foreclousres will skyrocket. It's "damned if you do or damned if you don't." By tightening lending practices and having borrowers more qualified you will slow the housing market down to a crawl. But, if you continue, and the economy goes south you will see an unforseen disaster as never before, as more and more families will be losing their homes as interest rates rise as the Fed tries to off set inflation fears.

Lastly, if the Boston economy continues to weaken with more and more mergers and companies leaving the city as of late and if housing inventory continues at its current rate things could get bad a lot quicker then what I am presently predicting.

Can the new Chairman of the Fed save the day? Hopefully, but I am doubtful. The saying "'s like rearranging the deck chairs on the Titanic" best illustrates my point. The Boston housing market hit an iceberg and it's sinking, changing the captain of the ship at this point may be to little to late. Hopefully the Fed Chairman (chairwomen) will tighten up the lending requirements for borrowers as they were in the past, so in the future so we don't repeat the same mistake.

Mr. Greenspan enjoy your upcoming mandatory retirement in the three months ahead, we will be reading about you in the history book and the Boston real estate market will be enduring your mess that you left behind for years to come.

The following comments are those of the writter not of the Ford Realty staff.


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