Why there is no housing bubble
The sky is not falling. Yes, home prices are sky-high, but we really don't have a housing bubble that is anywhere near bursting. Here's why. . . . Read the full story.
I am a real estate appraiser and have been since 1969, the year mortgage interest rates increased 50%. The housing price bubble in rural America is already losing air. The weak market areas have been gradually losing population during the last 15 years and the industrial base has moved to Mexico or overseas. These jobs are gone and with them the good incomes which supported the local real estate market.
Throughout history every price bubble was preceded by easy financing. From tulips to the stock market in the 1920s, financing inflated prices. The bubble was built on credit, not equity. Our current housing bubble will end and with it the consumers' financial ability to support our GDP. I’m told that real estate prices in Japan are less than half of their highs of 1992. If it can happen in the world’s second-largest economy, it can happen to No. 1.
Smart money has been moving out of leveraged investments and into cash equivalents. That’s why Mr. Greenspan has identified a conundrum. Safety and liquidity is the order of the day.
The one thing that is missing from this discussion and from others that dismiss the prospects of a housing bubble is the impact of rising home prices on property taxes. There are a lot of people out there that have stretched a long way to get into a house that they really can’t afford without carefully considering their exposure to property taxes. When you go in and buy a house and your total payment with escrow is calculated, you are simply covering the balance of taxes due for the current year at the old property valuation. I know some people who have received a nasty and unexpected surprise when they receive their new tax bill based on the new purchase price. In my area, this often adds another $100 to $300 to monthly payments in the next year, but it is something that is often overlooked by buyers and their realtors.
Basically, you are overselling the benefits of lower interest rates on the affordability of homes. I recently sold a home and purchased a new one in South Tampa (Fla.), which is a consistently strong housing market but not a “hot” market like some mentioned in your article. I sold a 900-square-foot house for $190,000 and purchased a new 1,750-square-foot house for $255,000, so I basically doubled my square footage for only $65,000. Taking all the equity from the sale of my old house plus some cash out of pocket, I am financing only $110,000 for 30 years at a fixed 5.5%. I financed about $60,000 on the old house at 7% back in 1994, so my principal and interest payments on the new house are only about $200 per month more than before. However, taxes on the new house will be approximately $350 to $375 more per month, so my total monthly payment with escrow will still basically double from what it was. I was prepared for this and this was a main reason that I did not try to buy an even bigger house.
Also, think about all of these people out leveraging themselves to the hilt to speculate on hot property for investment purposes. A simple slowdown in the market could have a big effect on these people, especially if they are paying steep property tax bills and can’t turn the property as quickly as they thought. Interest-only mortgages can reduce some costs, but not others. |
