Bob Ipock
Elite Member
- Joined
- Jan 15, 2002
- Professional Status
- Certified Residential Appraiser
- State
- North Carolina
Posted on Thu, Jun. 13, 2002
Jeff Brown | With stocks still slumping, a real estate bubble is a risk
By Jeff Brown
Inquirer Columnist
OK, so the stock market is in the dumps, but let's look on the bright side: Bond prices are rising, forcing mortgage rates down.
That enables homeowners to reduce their monthly costs by refinancing older mortgages, and it allows buyers to qualify for bigger loans.
Unfortunately, that makes it easier for people to get in over their heads. Perhaps this is a time to exercise some restraint, in case home prices fall sometime later.
It was only a few months ago that most experts expected mortgage rates to begin rising by the middle of the year. According to the thinking then, economic recovery would make inflation a bigger threat, and the Federal Reserve would respond by raising interest rates this summer.
Of course, it hasn't turned out that way. The recovery has turned out to be pretty sluggish. Earnings news at many companies hasn't been very good. Add to that the potential for war between India and Pakistan, troubles in the Middle East, persistent fear of another terrorist attack, and the Enron-Arthur Andersen fallout, and you have a stock market slump.
With stocks looking hazardous, many investors are turning to the safety of bonds. As demand for bonds goes up, prices rise, causing yields, or interest rates paid by bonds, to fall.
Yields on the 10-year U.S. Treasury bond have fallen below 5 percent this month for the first time since early March. Those rates were as high as 5.4 percent as recently as early April.
Result: Mortgage rates, which tend to follow the 10-year Treasury, are averaging around 6.7 percent, down from 7.2 percent in March.
Other aspects of borrowing also have become less expensive. These days, it's not hard to find a lender who requires a down payment of only 5 percent, and some require no down payment of customers with top credit ratings. You also can add the other closing costs to the loan instead of producing a wad of cash.
It wasn't many years ago that a 10 percent down payment was standard, and some borrowers had to pay 20 percent. Also, other closing costs once added 5 percent or 10 percent.
With easy lending terms, many people who could not have afforded to buy homes in the past can do so, and others can buy more expensive homes than they could when rates and closing costs were higher.
So what's wrong with that? Nothing, if you don't saddle yourself with too much house or debt.
But what will happen if things change?
Surely, interest rates will rise again someday.
When that happens, home buyers won't be able to borrow as much, so they won't be able to pay as much. In some parts of the country, home prices could fall. Think of the housing market as an auction. Prices depend on how much money the bidders have.
Today, home buyers are willing to pay a lot because they have easy access to lots of money - and because soaring real estate prices make homes look like a good investment.
Doesn't this sound familiar? It's frighteningly like the buying binge that drove the technology-stock bubble a few years ago. Many real estate markets may be in a bubble now.
People tend to think of housing as a sure thing. But it's not. When demand dries up, prices fall.
And when that happens, the biggest borrowers may be the worst off.
If you buy a $200,000 home with nothing down, and it falls in value by 10 percent, you end up with a $180,000 home - but still have $200,000 in debt. In order to sell for $180,000, you'd have to come up with $20,000 in cash to pay off your mortgage.
In fact, you'd have to come up with an additional $10,800 if you had sold through a broker charging a 6 percent commission. You could be trapped in the house, unable to take that new job or move to a better school district.
Imagine what that would be like if you lost your job and couldn't afford your house payment.
These are uncertain days. It's not a time to live at the limit. It's time to live within your means, build a rainy day fund - and resist the lure of the hot market of the day, whether it's Internet stocks or houses.
Jeff Brown | With stocks still slumping, a real estate bubble is a risk
By Jeff Brown
Inquirer Columnist
OK, so the stock market is in the dumps, but let's look on the bright side: Bond prices are rising, forcing mortgage rates down.
That enables homeowners to reduce their monthly costs by refinancing older mortgages, and it allows buyers to qualify for bigger loans.
Unfortunately, that makes it easier for people to get in over their heads. Perhaps this is a time to exercise some restraint, in case home prices fall sometime later.
It was only a few months ago that most experts expected mortgage rates to begin rising by the middle of the year. According to the thinking then, economic recovery would make inflation a bigger threat, and the Federal Reserve would respond by raising interest rates this summer.
Of course, it hasn't turned out that way. The recovery has turned out to be pretty sluggish. Earnings news at many companies hasn't been very good. Add to that the potential for war between India and Pakistan, troubles in the Middle East, persistent fear of another terrorist attack, and the Enron-Arthur Andersen fallout, and you have a stock market slump.
With stocks looking hazardous, many investors are turning to the safety of bonds. As demand for bonds goes up, prices rise, causing yields, or interest rates paid by bonds, to fall.
Yields on the 10-year U.S. Treasury bond have fallen below 5 percent this month for the first time since early March. Those rates were as high as 5.4 percent as recently as early April.
Result: Mortgage rates, which tend to follow the 10-year Treasury, are averaging around 6.7 percent, down from 7.2 percent in March.
Other aspects of borrowing also have become less expensive. These days, it's not hard to find a lender who requires a down payment of only 5 percent, and some require no down payment of customers with top credit ratings. You also can add the other closing costs to the loan instead of producing a wad of cash.
It wasn't many years ago that a 10 percent down payment was standard, and some borrowers had to pay 20 percent. Also, other closing costs once added 5 percent or 10 percent.
With easy lending terms, many people who could not have afforded to buy homes in the past can do so, and others can buy more expensive homes than they could when rates and closing costs were higher.
So what's wrong with that? Nothing, if you don't saddle yourself with too much house or debt.
But what will happen if things change?
Surely, interest rates will rise again someday.
When that happens, home buyers won't be able to borrow as much, so they won't be able to pay as much. In some parts of the country, home prices could fall. Think of the housing market as an auction. Prices depend on how much money the bidders have.
Today, home buyers are willing to pay a lot because they have easy access to lots of money - and because soaring real estate prices make homes look like a good investment.
Doesn't this sound familiar? It's frighteningly like the buying binge that drove the technology-stock bubble a few years ago. Many real estate markets may be in a bubble now.
People tend to think of housing as a sure thing. But it's not. When demand dries up, prices fall.
And when that happens, the biggest borrowers may be the worst off.
If you buy a $200,000 home with nothing down, and it falls in value by 10 percent, you end up with a $180,000 home - but still have $200,000 in debt. In order to sell for $180,000, you'd have to come up with $20,000 in cash to pay off your mortgage.
In fact, you'd have to come up with an additional $10,800 if you had sold through a broker charging a 6 percent commission. You could be trapped in the house, unable to take that new job or move to a better school district.
Imagine what that would be like if you lost your job and couldn't afford your house payment.
These are uncertain days. It's not a time to live at the limit. It's time to live within your means, build a rainy day fund - and resist the lure of the hot market of the day, whether it's Internet stocks or houses.
