Monday, June 27, 2005
It'll Pop
Following on the heels of Greenspan calling the real estate market "frothy," Sound Money ran a story on this weekend's show about the expected coming decline in housing prices. The summary of the segment was "The smart money is on home prices eventually deflating." To give the how and why of the decline, Kai Ryssdal interviewed David Shulman, who is now an independent real estate analyst. Here are a few of the fun quotes from the interview:
It'll pop...If you look at international evidence, you could have prices drop by as much as 30%. Basically we're running out of buyers.Shulman gave three triggers for the bubble bursting:
- The AMT will apply to 20 million taxpayers in 2006 up from 3.5 million in 2005. These folks will no longer be able to deduct property taxes or mortgage interest from their federal income tax. This changed will increase their bill by a few thousand dollars, removing buyers from the market.
- Banks are now offering option only ARMs in which the borrower pays neither principle nor the entire interest bill which causes payments to increase every month. The amount borrowed continually increases unless the borrower pays more each month than the lender requires. This will obviously place an increasing squeeze on borrowers and will look like a very bad investment when housing prices are no longer appreciating at a high rate than mortgage rates.
- In 2007 $1 trillion in ARMs will become adjustable. This is the biggest single year reset in history. For comparison, the value of such mortgages in 2005 was $80B and will be $350B in 2006. "If interest rates stay exactly where they are today, we'll find lots of folks paying anywhere between 50 and 100 percent more on their mortgage payments by 2007," said Shulman. I expect that some of these borrowers will begin to have to sell their property in order to get out of mortgages they can no longer afford.
posted by Leif Wickland @ 1:24 PM 
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Good observations. I've been waiting for some hard evidence that confirms my gut feeling that the housing market cannot possibly continue at it's present rate. I think here in the lovely treasure valley the market is perhaps even more inflated, but I also suspect that people selling out of their expensive California or Phoenix mortages will use the capital to turn around and buy a relatively cheap, but certainly very liveable home here...or maybe in MT if we're lucky.
Off subject remark: I've got a blog at http://benmscott.blogspot.com if you want to check it out sometime.
Off subject remark: I've got a blog at http://benmscott.blogspot.com if you want to check it out sometime.
I enjoy reading your comments, Leif. Here's my little hope: that the housing market will do its big drop before Mike and Jenn move to Billings next month! .. Pretty sure that won't happen!!
On a related note. I keep being amazed at the soaring price of housing! It seems to me it will have to come to an end. I have heard that people who used to invest in the stock market are now investing in real estate because of the huge returns. So as the market remains fairly flat, the ones who want to hit it big go for real estate ... I believe the old saying that "if it seems too good to be true, it probably is" ... there will be a great fall, I am convinced.
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On a related note. I keep being amazed at the soaring price of housing! It seems to me it will have to come to an end. I have heard that people who used to invest in the stock market are now investing in real estate because of the huge returns. So as the market remains fairly flat, the ones who want to hit it big go for real estate ... I believe the old saying that "if it seems too good to be true, it probably is" ... there will be a great fall, I am convinced.
# posted by 
: 10:42 PM MDT
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