The Daily Communicator
Real Estate Industry News.....
Why the housing bubble hasn’t burst (Part 1 of 2)
No one’s really sure if the nation’s housing market is a bubble at risk of bursting or fairly priced with more upside ahead.
But, analysts generally agree that low mortgage rates and other factors have boosted the market over the last five years,
through a recession, job losses and the September 11 attacks.
Still, some cracks are starting to show.
Reports on housing starts and new home sales, both considered leading indicators of the housing market, posted much
sharper−than−expected declines in November, although December’s starts rebounded smartly. And the November report,
the most recent available, showed median new home prices exhibiting a slim, but rare, year−over−year decline.
So are home prices set for a tumble? Here are three major areas to watch for warning signs of trouble ahead.
Low mortgage rates
A key factor supporting the real estate prices are continued low mortgage rates. Even economists who have warned of a
housing bubble for several years say low interest rates have helped the housing market stave off problems.
“The biggest surprise to me has been that interest rates have stayed as low as they have as long as they have,” said Dean
Baker of the Center for Economic Policy Research.
Baker said his projections are that rates will rise by about 1 percentage point this year, which he warned would be enough
to raise borrowing costs and start driving home prices lower on a national basis, as buyers can no longer use the cheap
financing to buy more expensive homes.
But other economists who aren’t as worried about a bubble argue it’d take a sharper increase in rates, up to 7.25 or even
7.5 percent, before it starts to cut into home sales. And, they say even rates that high would cut the pace of price increases
for homes, rather than send housing values lower.
Doug Duncan, chief economist for the Mortgage Bankers Association says that even in 1983, when interest rates rose by
2 percentage points and the number of home sales plunged, median housing prices increased, albeit by less than the rate
of inflation.
“We’ve had only two or three quarters since World War II when national average house price fell, and it’s never
happened for a full year,” said Duncan. “That’s not to say that it can’t happen. But, we’ve been through some quite wide
swings economically during that time.”
By Chris Isidore, www.money.cnn.com
reprinted with permission
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