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Monday, June 20, 2005 11:06:00 AM
"Creative financing" boosts risks in US housing boom
"Creative financing" boosts risks in US housing boom
Sun Jun 19, 4:36 PM ET
Newly completed townhouses line up waiting to be sold in Centreville, Virginia, a commuter suburb of Washington, DC. Economists warn the hot US real estate market bubble could burst much as the internet/tech market fell a few years ago.(AFP/Paul J. Richards)
WASHINGTON (AFP) - With US home prices going through the roof, more Americans are using "creative financing" to buy their dream house -- but experts say the moves only add to speculative fever in an already red hot market.
The traditional 30-year fixed rate mortgage is giving way to newer schemes -- adjustable loans with a low initial interest rate, and interest-only loans -- which offer lower monthly payments and help buyers who assume their homes will rise in value.
Some lenders are now offering 40-year mortgages to spread out and lower payments, or loans that allow for "negative amortization," using low payments that initially do not pay down principal, but eventually will rise.
The new financing methods aim to help "affordability" in a market in which prices have risen for the 13th consecutive year at an average pace of 8.3 percent -- well above historical averages.
With interest rates still low, the market is still red-hot, with home prices up 15.1 percent year-over-year in April.
This move into riskier loans has caught the attention of the
Federal Reserve, which worries about the implications of a sudden rise in interest rates or drop in prices that could put housing into a downward spiral.
"We worry that borrowers could become increasingly speculative, buying beyond their means and hoping for asset price appreciation -- whether they are buying for their own use or strictly for the sake of investment," Federal Reserve Governor Susan Bies said recently.
"We worry that competitive pressures could drive banks to lower their underwriting standards, implicitly encouraging such speculation."
Bies cited industry figures showing purchases of second homes and purchases of residential real estate for investment purposes accounted for almost 40 percent of all home purchases last year.
The boom has led to fears that buyers and lenders may be squeezed by a sudden rise in interest rates or a drop in home prices.
"The irony of today's housing market is that while fundamentals are supporting record levels in residential investments, housing affordability problems are climbing the income scale," said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies.
The center found that nearly one in three American households spends more than 30 percent of income on housing, and more than one in eight spend upwards of 50 percent.
The financing plans such as interest-only loans often save a typical home buyer hundreds of dollars in monthly payments at the start. But these loans also leave borrowers vulnerable to sharply higher payments when interest rates adjust or principal payments start to become due.
"With the number of borrowers vulnerable to payment shocks up, default rates predictably several times higher for subprime than prime loans, and house prices growing at such rapid rates, the housing market could deteriorate if the economy softens or if rates increase sharply," Retsinas said.
Because of the big role of the housing market in the economy -- and with many homeowners refinancing their homes to take out cash -- some experts fear a slide in property prices could have major repercussions.
Given the importance of the United States to world demand growth, its housing price developments warrant particularly close attention," said John Llewellyn at Lehman Brothers.
"To date there is little evidence of housing prices in the US starting to sag. And they may not. However, if or when local housing markets start to freeze up, the US could be in for a period of slow GDP growth. Or, just possibly, recession."
LINK: http://news.yahoo.com/s/afp/20050619/bs_afp/uspropertysector_050619203626;_ylt=AjfylhD1WnWOKJGm.hVbv...
"Creative financing" boosts risks in US housing boom
Sun Jun 19, 4:36 PM ET
Newly completed townhouses line up waiting to be sold in Centreville, Virginia, a commuter suburb of Washington, DC. Economists warn the hot US real estate market bubble could burst much as the internet/tech market fell a few years ago.(AFP/Paul J. Richards)
WASHINGTON (AFP) - With US home prices going through the roof, more Americans are using "creative financing" to buy their dream house -- but experts say the moves only add to speculative fever in an already red hot market.
The traditional 30-year fixed rate mortgage is giving way to newer schemes -- adjustable loans with a low initial interest rate, and interest-only loans -- which offer lower monthly payments and help buyers who assume their homes will rise in value.
Some lenders are now offering 40-year mortgages to spread out and lower payments, or loans that allow for "negative amortization," using low payments that initially do not pay down principal, but eventually will rise.
The new financing methods aim to help "affordability" in a market in which prices have risen for the 13th consecutive year at an average pace of 8.3 percent -- well above historical averages.
With interest rates still low, the market is still red-hot, with home prices up 15.1 percent year-over-year in April.
This move into riskier loans has caught the attention of the
Federal Reserve, which worries about the implications of a sudden rise in interest rates or drop in prices that could put housing into a downward spiral.
"We worry that borrowers could become increasingly speculative, buying beyond their means and hoping for asset price appreciation -- whether they are buying for their own use or strictly for the sake of investment," Federal Reserve Governor Susan Bies said recently.
"We worry that competitive pressures could drive banks to lower their underwriting standards, implicitly encouraging such speculation."
Bies cited industry figures showing purchases of second homes and purchases of residential real estate for investment purposes accounted for almost 40 percent of all home purchases last year.
The boom has led to fears that buyers and lenders may be squeezed by a sudden rise in interest rates or a drop in home prices.
"The irony of today's housing market is that while fundamentals are supporting record levels in residential investments, housing affordability problems are climbing the income scale," said Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies.
The center found that nearly one in three American households spends more than 30 percent of income on housing, and more than one in eight spend upwards of 50 percent.
The financing plans such as interest-only loans often save a typical home buyer hundreds of dollars in monthly payments at the start. But these loans also leave borrowers vulnerable to sharply higher payments when interest rates adjust or principal payments start to become due.
"With the number of borrowers vulnerable to payment shocks up, default rates predictably several times higher for subprime than prime loans, and house prices growing at such rapid rates, the housing market could deteriorate if the economy softens or if rates increase sharply," Retsinas said.
Because of the big role of the housing market in the economy -- and with many homeowners refinancing their homes to take out cash -- some experts fear a slide in property prices could have major repercussions.
Given the importance of the United States to world demand growth, its housing price developments warrant particularly close attention," said John Llewellyn at Lehman Brothers.
"To date there is little evidence of housing prices in the US starting to sag. And they may not. However, if or when local housing markets start to freeze up, the US could be in for a period of slow GDP growth. Or, just possibly, recession."
LINK: http://news.yahoo.com/s/afp/20050619/bs_afp/uspropertysector_050619203626;_ylt=AjfylhD1WnWOKJGm.hVbv...
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