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Kill the next boom in the cradle?

By Holden Lewis · Bankrate.com
Wednesday, May 30, 2012
Posted: 10 am ET

Home sales have turned around. 2012 will be better than 2011, and 2013 will be better than 2012, according to the National Association of Realtors. And then there's this prediction from the NAR's chief economist, Lawrence Yun: In Miami and Phoenix, homes "will easily achieve double-digit price growth by year-end."

If this prediction comes true, it raises the question of whether we should do anything about it. I think we should.

We tend to think that double-digit inflation is calamitous, except when we're talking about house prices. But when house prices spiral, buyers become dizzy. Rapid house price increases distort buyer behavior. People overpay for houses today so they won't overpay even more tomorrow. And then a crash follows.

Here's my suggestion: Raise minimum down payments in markets where house prices are rising quickly.

If, at the end of this year, home prices are rising at a 12 percent annual rate in Phoenix, it is madness to allow people to buy homes with FHA financing for just 3.5 percent down. That merely feeds the house-price spiral.

How much should down payments be raised, and what should the triggers be? I don't know. The details can be worked out by executives at Fannie Mae, Freddie Mac and the Federal Housing Administration.

The Miami market is unique because so many of today's buyers are foreigners, and a lot of them pay cash. Still, I think it would be a good idea to require domestic buyers there to make sizeable down payments when they get mortgages. Let the foreign cash buyers lose money in a housing boom and bust. But borrowers who live in their houses full time? We should insulate them from boom-and-bust.

This mini-rant was incited by the release today of the NAR's pending home sales index. Pending home sales were down in April compared to March, after rising for three months straight. Yun says that's no biggie because year-over-year home sales have been up for 12 months in a row. I think he's right. Much of the country is in a housing recovery with rising sales and prices.

According to the NAR, 4.26 million "existing homes" were resold in 2011. The NAR forecasts that about 4.66 million will be resold this year and 4.92 million will be resold next year. The NAR predicts that nationally, home prices will rise 2 percent to 3 percent this year and 4 percent to 5 percent next year, "with wide local market variations."

What do you think? Should Fannie, Freddie and the FHA tighten down payment requirements in housing markets where prices are rising at double-digit rates?

Follow me on Twitter @HoldenL.

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