Dan Gillmor, among others, has written frequently about a housing bubble and the strong likelihood that metropolitan California and possibly most major American metropolitan areas will suffer a significant correction or worse when the bubble is popped, which he sees as pretty much a mortal lock. “This market may be a sucker’s bet,” he wrote and who am I to argue with him?
The trigger will be a return to more normal interest rates than what we’ve enjoyed for the last 4-6 years. I’m guessing 30 year fixed rate loans above 8% for more than a month will do the trick. Bankrate.com says this week they fell one basis point to 5.67% according their national survey of large lenders. So that means a, say, $250,000 mortgage has a monthly payment of $1446 but if the rate goes to 8.125% the payment rises to $1856, nearly $5,000 more out of pocket every year. Not an amount most families can just pay out of pocket change.
No, instead rising interest rates will decimate afforability. Even now California homes are barely within reach of most people. In 2004, according to the California Association of Realtors (C.A.R.), for the third straight year home sales and the median home price reached record high levels, while supply conditions and the share of first-time buyers in the California housing market fell to historic lows.
“At 20 percent in 2004, affordability in California was less than half that of the nation.” More sweet words from the C.A.R., whose report goes on to say that rates are “expected to increase by 50 to 75 basis points as the economy grows in 2005, with the fixed-mortgage interest rate expected to be just under 7 percent by year’s end.” Already, only people selling one home to buy another can participate in the market and those who don’t are unlikely to find a way in until the bubble bursts.
[I am one of the lucky ones, no doubt, having bought Casa de BillSaysThis back in 1998. Even so I paid 20-50% more than some of my neighbors (all the homes in our little development are identical in size and layout) who purchased theirs just a few years earlier but I also know of several more recent sales at prices 50% more than mine. And as far as I’ve read and heard even those buyers would make a profit selling today.
I’ve also had a good mortgage broker. Each year for the last three years she called and asked if I wanted to refinance–no closing costs at all–at a substantially lower rate. Hard to say exactly but I figure she’s saved me over $400 a month, nothing to sneeze at. This year, though, I don’t expect to get a fourth call.]
If you bought your home in the last three years and didn’t lock in a 30 year fixed loan, what will you do when rates go up? The Fed raised rates again this week, six quarter point increase in a row, and the dollar is down enough that foreign investors will begin demanding higher returns to pay for this risk. They’ve been propping up our lack of savings to the tune of $2 billion a day and even the revered but recently politicized Alan Greenspan is saying that can’t last.
Just one more thing to put on your long list of worries.
BillSaysThis 