Housing booms don't always lead to busts --
Angell and Williams demonstrate
that busts don't necessarily follow booms, and busts usually accompany problems
with the local economy. If history is a reliable guide, most of today's skyrocketing
housing markets have little to worry about, then. But Angell and Williams worry
that "there are reasons to think that history might be an imperfect guide
to the present situation."
The researchers conclude that we're in
an unprecedented boom time. In an update
based on newer home-price data, Angell and Williams calculate that 55
metro areas were experiencing booms in 2004 -- "the highest proportion
of 'boom' markets nationwide in the 30 years of historical price data,"
they write. Nationwide, home prices rose an average of 11 percent in 2004.
The boom is so widespread that the economists look for
an explanation beyond the usually local causes. "If national factors
are coming more into play, then clearly the most important factors to
look to would be the availability, price and terms of mortgage credit,"
they write. They point out that the average rate on a 30-year mortgage
was below 6 percent in 2003 and 2004, and ARM rates have been at levels
not seen since the 1950s.
"The low cost of mortgage credit at this stage
of the housing cycle could be one factor pushing prices higher, by enabling
buyers to qualify for larger mortgages given the same monthly payment,"
that subprime mortgages -- home loans for people with imperfect credit -- have
become popular and account for 10 percent of mortgage dollars outstanding. And
they observe that a lot of people borrow more than 80 percent of the home's price,
often using piggyback loans. Those people could get smacked if they have to sell
for less than they paid.
"I think people that are
highly leveraged, they'll certainly be at risk if there's a price correction,"
says Arkadi Kuhlmann, chief executive officer of ING Direct, a bank that does
business mostly over the Internet.
Mark Olson, a Federal
Reserve governor, publicly worried recently about two types of adjustable-rate
mortgages: interest-only loans and option ARMs. With an interest-only loan the
borrower doesn't have to pay principal. Options ARMs have minimum payments that
don't even cover the interest accrued, so the borrower can make a payment and
still end up owing more at the end of the month than at the beginning of the month.
In a speech at the Federal Reserve Bank of Cleveland, Olson
said that "to the extent that these new mortgage products promote
home-buying decisions that are premised on unrealistic rates of home appreciation,
they raise concerns. Some borrowers may not be able to sustain such a
loan over a long time horizon if the pace of home-price growth moderates.
In particular, when the payments on these novel mortgages adjust upward,
the home buyer may not be able to refinance such mortgages unless the
home has increased in value."
don't have to be an English major to read between the lines and understand that
Olson thinks home prices could stall or fall.
ING Direct, is willing to entertain the possibility that prices could drop, but
he thinks it's more likely that they would "begin to stabilize and flatten
out, so that basically they go sideways." Even if prices drop, that shouldn't
hurt people who own their homes for many years, he says, because prices eventually
People in the real estate business like to say that booms
and busts are unpredictable, so you might as well buy a house. Patrick
Lashinsky, vice president of ZipRealty, a low-cost brokerage based in
Emeryville, Calif., refuses to be drawn into the bubble speculation. "The
reality is there's nobody who knows right now, and if you really knew,
you could retire with multimillions of dollars," Lashinsky says.
His colleague, Christian
Coleman, is district director for ZipRealty in San Diego, which many observers
consider to be a bubble market. "Some people have talked about what if the
bubble bursts," he says. They wonder if they should "sell the home,
rent a couple of years, and if it dips down, buy again."
He's heard that talk, but he doesn't recommend bubble sitting. It's hard to imagine
the entire San Diego area losing home values, he says, because so many people
want to live there and there's little room for expansion with the Pacific on the
west, Mexico to the south, Camp Pendleton on the north, and desert mountains to
One would expect real estate agents to urge people
to buy homes. They wouldn't earn a living otherwise. But they also seem to sincerely
believe what they say. So do Angell and Williams of the FDIC, whose study shows
decisively that busts don't always follow booms.
and Williams also demonstrate that booms don't last forever. They offer this bit
of hope to renters who fear that they will forever be priced out of homeownership:
"In over 80 percent of the metro-area price
booms we examined between 1978 and 1998," they write, "the boom
ended in a period of stagnation that allowed household incomes to catch
up with local home prices. While neither lenders nor current homeowners
particularly like stagnation in home prices, such an outcome represents
a necessary adjustment in market conditions that helps bring home prices
within the reach of new home buyers."
Should you rent and wait for home prices to stagnate for a few years? Maybe.