Thanks for the link, Julio. I knew about this from reading a Wall Street Journal article, but your link is more complete and consise.
One of the questions I have heard regarding this is that Fannie's new charge may dampen the housing market at a critical time for the rest of the economy. If people don't cash-out and spend the money on that new SUV, then the recession may double. What do you think?
Despite concerns about record borrowing against home equity, we've been remarkably responsible with the windfall. Rather than squandering it on ostentatious cars and watches (or investing it in stocks), much of the borrowed cash has been plowed right back into our homes. "Well over half of what was spent went into housing," says David Berson, chief economist for Fannie Mae. "It could be second homes, or more likely people remodeled."
Anyone who's tried to get on a carpenter's schedule recently knows that remodeling is on a tear. To a large extent, homeowners are paying the bills with cash-out refinancing (borrowing more on a refinanced mortgage than is needed to pay off the old loan), or a home-equity loan or line of credit. All those improvements mean that one force driving up home prices is that buyers are getting more house.
Is a bubble building?
Experts from Alan Greenspan on down say there's no real bubble in U.S. housing markets. In testimony before Congress, Greenspan attributed the "recent sizable increases in home prices" to low mortgage rates, immigration and the shortage of land available for building homes in some areas. Our exuberance, it seems, is quite rational.
But it's important to understand what economists mean when they talk about a "bubble." They're thinking of a wild run-up in prices followed by a sudden bust. That's rare in the history of U.S. real estate. Texas blew up a good one back in the 1980s, whetted by lax tax-shelter laws that encouraged money-losing partnerships, savings-and-loan officials who didn't know the meaning of fear and fly-by-night appraisers who didn't know the meaning of value. Investors bought and flipped properties so fast that true values blurred. Falling oil prices in the mid 1980s decimated Texas's employment rolls, popped the bubble, and drove down home prices 20% to 30%. It took the better part of a decade for Texas housing markets to return to normal. Southern California and New England experienced similar price drops back in the late '80s and early '90s. It took most of the past decade for their rate of growth to catch up to the rest of the country. So, when experts say that there's no housing bubble, they don't mean that recent price surges are sure to continue. They mean that Armageddon isn't coming.
More people, less land
Soaring gains in home prices have already started to slow, starting with the most expensive homes. Assuming you're not trying to sell a high-priced home, that's good news because it relieves pressure on any housing-market bubbles that may have been building. Nationwide, price growth will fall more into line with income growth. After all, there is a limit to how far buyers can stretch to get into a home. "Home-price growth of 5% to 5.5% per year will easily be supported by income gains we should see this decade," says Fannie Mae's Berson. That's not a bubble bursting; it's simply a return to normalcy.
Demographics practically dictate that homes will continue to sell easily and appreciate at least moderately in coming years. Large numbers of immigrants who arrived in the 1980s and 1990s are now in a position to buy homes. Baby-boomers are ripe for buying a vacation home and, eventually, places to retire. Their kids are due to hit the housing markets in force around the middle of the decade. Even after years of unrelenting building, the supply of existing homes remains tight.