Dueling trends in residential real estate
see "April existing home sales at record high" and "Many Buyers Opt for Risky Mortgages" (Washington Post, 5/28/05) It was a week of dueling news stories about the housing market. First, statistics that housing prices and quantity of home sales continued to rise dramatically in April, with the average home price topping $200,000 for the first time. Then, in today’s Washington Post, comes a story that most…not just some…of the mortgages written in the District of Columbia in 2005 were interest-only loans. This report says the number is an astonishing 54%. As I’ve mentioned in many prior articles, it’s hard to know when the housing boom will end, and it probably won’t have a dramatic end while interest rates stay low if the economy is doing alright. But the boom will end. And when it does, the prevalence of highly leveraged homeowners will exacerbate local downside in terms of price declines, length of time that the market stays weak, or both. Using a metaphor I often use when talking about the residential real estate market, the director of housing and credit policy at the Consumer Federation of America calls it “a game of musical chairs”. It’s even worse than the usual game because there is more than one player who will be stuck when the music stops. And the more players who are stuck without a chair in round one, the more who will have to lose on the next round as falling prices force them to sell…a vicious circle of bad investment not entirely dissimilar to a panic-induced run on a bank. I have already explained the risks of this type of leverage but if you read the above article you can get a refresher course on the perilous path that overuse of interest-only loans puts the housing market on to.
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