More Housing Bubble Evidence
I am of the opinion that the US is going to face its worst economic downturn since the Depression within the next couple of years. I think this for a variety of reasons, but one of them is what I perceive as the unsustainable increase in home values over the past decade. Except for a few markets such as Boston, New York and the Bay Area, there is simply too much cheap land out there for homes to be worth as much as they seem to be. I was just in Phoenix and in the suburbs there are relatively modest houses going for close to a half-million dollars with open desert 100m away. It does not make sense. CNN Money reports (without really considering the larger effect), that real estate appraisal groups are starting to complain about pressures from lenders to inflate property values. One of the interesting economic effects (that makes me think a real-estate crash in some markets is imminent) is that mortgage interest rates have not tracked the prime rate very well recently. The Fed has increased rates, but these institutional rates haven’t climbed significantly. It is starting to become apparent why this is the case: the real estate lending market is now layered. Many “lenders” that homebuyers deal with are just brokers that hand off the mortgage to larger lending institutions for a fee. There are two effects of this: 1) as descibed in the article, appraisers are pressured by lenders to increase the apparent value of the real estate, so that their hand-off to the true lender yields more commission and 2) there is increased lag in mortgage interest rates.
Does anyone remember how bookkeeping tricks, buck-passing and underinsurance has resulted in a lot of people getting screwed on their pensions? Watch what happens when this business model breaks and your father’s advice to invest in your house “because it always appreciates” takes you way underwater on your mortgage.
June 18th, 2005 at 8:51 pm
Interest rates on houses are determined primarily by the LONG TERM expectations for inflation. Changes in the short term interest rate (“prime”) should not really affect the interest rate. You could construct a stronger argument by saying that the interest rates are not sustainable (i.e. market is wrong…which means it will “correct”) based on budget deficits or the like. Of course, then it is just you against the market.