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Low rates encourage upgrades, not speculation Are low mortgage rates helping to cause a ready-to-burst bubble in home prices? Some observers fear that prices will drop precipitously when mortgage rates rise. Others say that there's little evidence of a speculative bubble in housing. Mortgage rates remain temptingly low this week as the U.S. economy continues to crawl out of its brief recession like a housefly struggling out of a pool of pancake syrup. The recovery is slow-going and sloppy, and mortgage rates remain below 7 percent. The benchmark 30-year fixed-rate mortgage rose 1 basis point to 6.83 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.44 discount and origination points. Someday the economic recovery will gain steam and mortgage rates will rise. There have been rumblings in the media for the last couple of months that home prices in much of the country will take a big hit when mortgage rates get appreciably higher. A Barron's cover story made that argument last month, prompting a member of Congress to ask Federal Reserve Chairman Alan Greenspan about it during congressional testimony a few days later. More recently, Irwin Kellner, chief economist for CBS.MarketWatch.com, warned about a housing price bubble. "When mortgage rates are as low as they are today, a home becomes much more affordable than it otherwise would be," Kellner wrote. He noted that demand for housing is high because of strong population growth in the 25-to-44 bracket and a lackluster stock market that encourages people to regard housing as an investment. Combine that high demand with lack of supply because cities and suburbs are already built up, and that's why prices are soaring, he wrote. "But once mortgage rates start to climb, housing prices, instead of raising the roof, may sink into the basement, instead," Kellner predicted. This point of view has its critics. Among them is Greenspan, who said in his congressional testimony last month that speculative bubbles in real estate are rare because it costs so much money and time to buy and sell houses and move. It's easier to blow up a speculative bubble in stocks, he said, because it doesn't cost much to buy and sell stocks and the market in stocks is international. Len Zumpano, chairman of real estate at Alabama Research and Education Center at the University of Alabama, says he has heard a lot of talk about a bubble in real estate and has been trying to figure out how to analyze whether one is developing. He doubts that such a bubble exists. Zumpano takes a lot of stock in the National Association of Realtors' housing affordability index, which measures whether a family earning the median national income can afford a mortgage on the national median-priced home. The affordability index hasn't changed much in the last three years, so "it makes sense that people are buying homes," Zumpano says. He believes that demographic changes will cause housing prices to trend upward through 2010. The youngest baby boomers are still buying starter homes or upgrading to their second houses, while the oldest boomers -- people Bill Clinton's age -- are in their peak earning years. When their kids graduate from college, they suddenly have more money to spend. "These people are buying properties," Zumpano says. "They're not stepping into the boonies and saying, 'It's time to downsize, dear.' They're buying bigger homes, more elaborate homes and more expensive homes with more amenities than anyone had before." Immigrants, especially Asian immigrants, are buying a lot of houses, too, he says. As mortgage rates rise and fall, there will be swings in supply and demand that affect housing prices, but Zumpano believes demographics will play a larger role during this decade: "These are longer-term trends that are going to play out no matter what happens in the short term." |