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To: patron_anejo_por_favor who wrote (115639)	8/5/2001 10:41:11 AM
From: Perspective	Read Replies (2) \| Respond to of 436258

Home equity takeouts "smart"? These people frighten me, seriously. Don't they understand the difference between doing the "correct" thing and the "logical" thing in a market? When the price of a thing goes up, I say the market is asking you to do the "correct" thing and add supply - SELL. These guys see a rising real estate market as a signal to do the "smart" thing and pile on - BUY. Isn't that how the tech stock bubble formed? Guess I'm just whacked in the head or something... BC siliconinvestor.com Home Price Rise Poses Little Economy Risk Aug 5 7:54am ET By Andrew Priest NEW YORK (Reuters) - As U.S. property prices soar in the wake of last year's technology stock collapse, economists are looking over their shoulders to the late 1980s property price bubble, whose burst pitched the U.S. economy into the last recession. The October 1987 stock market crash had little immediate broad economic impact. But as investors piled out of stocks into property, housing prices soared before derailing at the end of the 1980s as interest and mortgage rates rose. When the housing bubble burst, consumer spending slumped and the economy slid into recession. House prices have also soared in the wake of last year's stock crash, which has seen tech shares tumble 60 percent. An added danger this time around is that many homeowners have been cashing in on lower interest rates by refinancing their loans, both to lower their monthly payments and to turn their equity into cash. "Like in the late 1980s, we have seen that when stocks fall, real estate is seen as an attractive place to go. And in the '80s we saw that an over-inflated property market led to major economic problems," said Jim Glassman, senior economist at J.P. Morgan Chase. But Glassman and other economists said circumstances are very different this time around. "The real estate sector did prosper for a few years after the stock market crash of 1987 but this time around Federal Reserve interest rates have already fallen a lot and there are no signs that will soon change," said Kevin Logan, senior economist at Dresdner Kleinwort Wasserstein. Existing home sales were at a 5.22 million annualized pace this June, up 2.9 percent from June 2000 as Nasdaq stocks crumbled. House prices rose even more strongly. The median house price in June was $152,600, up 8.8 percent year-on-year. But unlike 1989, when 30-year fixed-rate mortgages pierced 11 percent, the low mortgage rates underpinning the recent rip-roaring surge in house prices are likely to stay low this time amid no signs of inflationary pressure as the economy struggles to find its feet, economists said. "Recent house price gains have been very strong and can be attributed to low mortgage rates," said Lawrence Yun, chief economic forecaster at the National Association of Realtors. "We don't see any reason for rates to rise strongly as inflation is relatively tame," he added. Freddie Mac said on Thursday its average mortgage rate was 7.00 percent in the week ending August 3, the lowest since March 29 and compared with more than 8 percent a year ago. Rates have fallen as 10-year Treasury note and mortgage-backed bond yields -- which determine the level of mortgage rates -- have tumbled as investors have priced in further economic weakness and low inflation pressure ahead. CONSUMER LIFELINE Consumer spending has been the economy's lifeline this year, keeping growth above water despite a sharp downturn in business investment spending that has pitched the manufacturing sector into a one-year contraction. Despite worries that as stocks fell wealth would evaporate and crimp spending, rising house prices and falling mortgage rates have allowed consumers to cash in on years of appreciation. The government is also mailing out approximately $38 billion in tax rebate checks this summer. "House prices have been going bonkers and I do see some potential for more refinancing -- not from people looking for lowering payments but from people looking to take some equity out," said Robert Van Order, chief economist at Freddie Mac, the mortgage finance giant. "From the standpoint of its economic effect, it's a plus." With high returns on stock investments now a dim memory, policy-makers, including Federal Reserve Chairman Alan Greenspan, have noted the key role refinancings have played in keeping spending buoyant. Consumer spending rose 2.1 percent last quarter, vs. a 13.6 percent fall in business spending. "There is very evident strength that's coming into the consumer markets from the extraction of equity out of homes," Greenspan told lawmakers on Capitol Hill in mid-July. The plunge in stocks since early 2000, especially technology shares on the Nasdaq exchange, has spurred a switch from risky securities to higher-yielding real estate. Many Americans have either traded up to bigger houses or are renovating and raising the value of their homes. "The household sector is doing the smart thing. They are growing more optimistic that real estate values will keep going up and taking on more debt to fund improvements," said Glassman. Economists say evidence of this shift, which also occurred in the late 1980s, is mostly anecdotal, but the low volatility and steady appreciation of house values is a tempting lure. "Real estate is the natural place to go when stocks weaken," said Glassman. Economists estimate that every one percentage point fall in mortgage rates opens the door to owning a home to 3 million more Americans, increasing demand for existing housing. The Mortgage Bankers Association of America expects mortgage lending volume to hit a record $1.538 trillion in 2001, 50 percent higher than in 2000. Refinancings to save on borrowing costs make up 43 percent of this business. "People have gotten more sophisticated and are now refinancing at the drop of a hat," said Glassman. The 30-year mortgage rate was last at, or under, 7 percent -- a level which makes economic sense for many homeowners to shoulder the cost of locking in a new rate -- in late March. "Rates have gone down and people do follow the markets quite closely," said Van Order.