When will the real estate
market crash?
BY MARTHA SMILGIS
Special To The Examiner
Nationwide, May was a boom month in the still sizzling residential
housing market. Housing starts were up 12 percent (the biggest gain
since 1995) and new home sales were up 8.1 percent (the biggest
gain in 6 months). During the past year, the median price for a new
home in the U.S. increased 6.6 percent.
Meanwhile, moneylenders are crawling out of the woodwork. The
mortgage industry is taking in billions, giving easy money to anybody
and everybody. The refinancing mania has hit a new high, with rates
on a 30-year fixed loan hovering around 6.6 percent -- the lowest in 40
years.
And this blistering refi market is hardly over. Economists predict
that if mortgage rates drop below 6 percent, there'll be another fresh
wave of refi candidates -- those holding fixed rate loans at 7 percent.
But as many investors have painfully learned, markets of all types
are based on supply and demand. This creates cycles. Although no
one expects a seismic shift back into stocks tomorrow, there are
signs that the real estate market is peaking, wobbling and possibly
ready to cave.
For starters, the economy is slowly picking up. Interest rates can
only stay down for so long without sparking inflation. When the feds
raise rates -- and they will -- fixed mortgage rates will rise, scotching
the refi boom. Those "indexes" that adjustable mortgage rates are
tied to will also soar. People attracted to home ownership because of
low interest rates will vanish.
There's solid evidence that high-end housing -- up 40 percent (Palo
Alto, Napa, Santa Barbara, Aspen) -- has run its course. What's still
cooking is the sub-prime mortgage market. It is this less
credit-worthy group that is now enabling developers to make money
on low-end housing.
These days, many advertised loans require only 3 percent down --
or even no down payment. These "interest only" loans allow buyers to
put off paying principal for 15 years. Of course, when market
conditions change, the people who fell for this sales pitch will find
themselves owning a mortgage and not a house.
Even reputable mortgage brokers and banks are sucking in people
with adjustable loans under 4 percent. The reasoning behind the pitch
is that you will soon sell the house for a profit in a year or two. That
way, you make money before the adjustable rate escalates to 7
percent and your mortgage payments swiftly double.
Guess what? In two years, no one wants to buy the house you
overpaid for and you are stuck with budget-breaking payments.
Goodbye house, hello foreclosure.
Another ominous sign is that when mortgage rates first dropped,
most applicants wanted fixed 30-year loans. Very sensible. But
during the past two months, there has been a 75 percent increase in
applicants for adjustable-rate mortgages. Sucked in by super low
interest rates now, these folks best brace for a rude awakening.
Adjustable rates can escalate quickly.
As for commercial real estate, because of the anemic economy,
rentals are down and vacancy rates are climbing. The FDIC is
concerned banks don't have enough equity coverage for their hefty
commercial real estate loans. So far, there have been few
foreclosures. But just wait until interest rates go up on those
adjustable loans while rental income dwindles.
Like spring flowers, Realtors' for sale signs are everywhere. There's
so much competition out there that many have cut commissions from
6 percent to 4 percent. Spec houses and flip artists abound. Just
about every shack and garage (with a new coat of paint and terra
cotta pot of ferns) is for sale at a ridiculous price.
Aside from this obvious evidence, the most convincing sign that
the real estate market is bound to cool is that construction industry
insiders are selling their shares of housing stocks in great number.
They know plenty we don't know.
Also, keep in mind that after the California real estate market
dropped in 1990, housing prices were at a standstill for four to five
years. Of course, the population is increasing and people will always
require housing.
But those in need and with money have bought homes and are
now saddled with huge debt. Day by day, throughout the housing
market, saturation points are being reached.
msmilgis@aol.com