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[Phoenix]

WASHINGTON (Reuters) - Whether it's a national bubble or just pockets of regional froth, an end to surge in home prices could inflict economic harm that would make the 2000 tech bust look tame in comparison.

Even if the market cools in only those parts of the country that Federal Reserve Chairman Alan Greenspan describes as "frothy," the U.S. has a serious problem.

If prices were merely to level off, it could subdue the property-linked activity that has stimulated spending and job growth -- crucial supports for the U.S. economy.

Based on benchmarks from a recent International Monetary Fund study comparing the stock and housing market bubbles, there are about 15 markets that are vulnerable to a housing market correction. These represent about 35 percent of gross domestic product, the broadest measure of the nation's economy.

"A significant correction in consumption spending in these states is bound to have significant effects on national growth," said Thomas Helbling, an economist at the IMF in Washington.

Merrill Lynch estimates the impact on growth could be as much as one percentage point of gross domestic product.

Add the knock-on effects to the rest of the economy to any initial spending hit and the situation looks worse.

The IMF study found that while stock market collapses are more frequent, housing busts do a lot more damage.

"The output loss associated with the typical housing price bust (about 8 percent of GDP) was twice as large as that associated with a typical equity price bust," the study said.

Fed hot rhetoric
The Federal Reserve understands these risks, which is why its top officials have talked of revamping lending guidelines to reduce speculation.

"They are certainly well aware of the fact that what is going on in the housing market could predispose toward problems down the road. And to the extent that they could avoid it, without upsetting the economy currently, they would certainly like to do that," said former Fed Governor Lyle Gramley.

The situation calls for more gradual interest-rate rises, since stopping now would only further fuel the housing boom, he said.

When it raised rates Thursday for the ninth straight time in a year, the Fed, the nation's central bank, gave no indication it was prepared to stop in the near future.

A look at the U.S. economy's reliance on the housing sector in recent years is helpful in gauging the impact of a serious market upset.

American households have enjoyed a $4 trillion rise in wealth, thanks to a 40 percent gain in house prices since early 2001, according to Merrill Lynch.

A lot more after the jump

 

[cubanb]

Good, Maybe I will finally be able to buy something in California

 

[Baron Aloha]

BRING IT ON!!!!!

Seriously. I cannot wait for this to happen. I've been saving/wanting to buy my own house for the longest time now but the prices are utterly ridiculous in Maryland (#6 on CNN's list of the most inflated markets).

Just to give you guys and example. My parents purchased a home in 2000 for ~300K. They could sell their house today and easily get 700K for it. No doubt in my mind. Other people in the neighborhood (people whose houses aren't as nice as my parents) are getting upwards of 650K right now.

 

[DarienA]

Yeah I knew MD/DC were gonna be on that list... our house just re-appraised for a ridiculous amt... two and half times the purchase price from.. oh about 6-7 years ago. It was bought at about..150-160 IIRC... appraised about 2 weeks ago... at 398. Crazy.

 

[open_mouth_]

I'm sure there's gonna be some sort of check-- there HAS to be. These price increases are insane. Houses have basically doubled in price in the last 15 years (though the real value of those $$ are less than double, probably more like a 65% increase). Still, it's pretty substantial. Anyone in the market to buy a new house right now (without having an old house to sell) is in a tough position.

I'm in a tough position

 

[Doth Togo]

But, if the market collapses, lots of people will loose their savings...potentially the job market may crash as well as a result.

 

[ToxicAdam]

A crash in new housing starts will crush this economy unlike anything you have ever seen.

Do not hope that this occurs.

 

[VALIS]

Yeah I knew MD/DC were gonna be on that list... our house just re-appraised for a ridiculous amt... two and half times the purchase price from.. oh about 6-7 years ago. It was bought at about..150-160 IIRC... appraised about 2 weeks ago... at 398. Crazy.

Yep. I bought for $121K in 1999 and my friend who's a realtor says I could easily get $325K+ for it. Insane. I should have my house on the market by Aug 1 if everything goes well. PLEASE DON'T CRASH YET!!

 

[cubanb]

But, if the market collapses, lots of people will loose their savings...potentially the job market may crash as well as a result.

Well the same thing happened to Japan when they came crashing back down to Earth. Their real estate was overvalued due to really low interest loans during the bank deregulation process and also tax breaks that favored real estate investment.
The current housing growth is something that just can't be sustained. Many people are paying off only the interest on their new housing loans, but will soon find they bought above their means. Something needs to give, there needs to be some correction is any of my generation wants to own property through ways besides inheritance.
Current homeowners have enjoyed unprecedented appreciation whereas its hard for young people to even enter the market. I plan on renting until something happens, if nothing happens, I will have to leave the state to find property.

 

[Fatghost]

In Canada we had a major real estate collapse in 1990. I remember a friend of mine who's parents had bought a house and estate for 1.3 million (and were carrying most of that as a mortgage at current mortgage rates). A year later, they had to sell the house and got about 300K for it.

A major real estate collapse would beat the shit out of anyone who had a recent perchase and was carrying a mortgage. People who bought recently but didn't have a mortgage would be OK in that they could wait out the market for prices to rise. People with high ratio mortgages would be pretty fucked though.

And of course, the real estate boom has seriously shored up many commodity prices, helped boost the labor market, provided a lot of business to the financial services sector, and it would really hurt if there was a major downturn.

But it's bound to happen though...but historically speaking, aren't the cycles in real estate much longer than this usually? This housing boom is only a few years old, I seem to recall the other booms lasting for a decade or longer.

 

[fennec fox]

I talk a lot of crap about Houston, but right now it's pretty much the only major US city where a single person with an average salary can afford to buy a house. I do appreciate that, since I'm seriously considering buying next year.

 

[Fatghost]

Current homeowners have enjoyed unprecedented appreciation whereas its hard for young people to even enter the market. I plan on renting until something happens, if nothing happens, I will have to leave the state to find property.

Is this the situation in the US?

In Canada, it's never been easier for young people to get into the housing market. Mortgage rates are low, new developments are springing up everywhere and townhouses and starter condos carry for pretty cheap. It's still common in areas around Toronto to be able to carry a mortgage on a new property for cheaper than renting a similar property. We've also seen a great deal of relaxation on down payment rules and I frequently seen 20 somethings buying a house with a 5% downpayment and having affordable monthly payments.

Of course, good luck buying in an established neighborhood.

 

[open_mouth_]

Well the same thing happened to Japan when they came crashing back down to Earth. Their real estate was overvalued due to really low interest loans during the bank deregulation process and also tax breaks that favored real estate investment. The current housing growth is something that just can't be sustained. Many people are paying off only the interest on their new housing loans, but will soon find they bought above their means. Something needs to give, there needs to be some correction is any of my generation wants to own property through ways besides inheritance.
Current homeowners have enjoyed unprecedented appreciation whereas its hard for young people to even enter the market. I plan on renting until something happens, if nothing happens, I will have to leave the state to find property.

True. Either way, though, the shit is gonna hit the fan sooner or later. I'd guess that in 2-4 years we'll get some sort of correction and it may even be very major. However, if you look at history, the trend for real estate is always upwards, regardless of the infrequent downward spikes that occur every now and again. The winners will be those who wait it out to buy, not sell.

 

[Baron Aloha]

When someone making what I make cannot afford to buy a house anywhere but in some slum then there is a problem.

This is long overdue. Job market and economy be damned. Things should have never gotten this bad in the first place. Thats why its called a correction. The people buying/selling houses left and right have been making out like thieves and its time for some common sense to kick in.

Its a shame that some people would lose money but a part of me says "you know what... if you are stupid enough to overpay for a house you deserve what happens because you are contributing to the problem".

 

[fennec fox]

In Canada, it's never been easier for young people to get into the housing market. Mortgage rates are low, new developments are springing up everywhere and townhouses and starter condos carry for pretty cheap. It's still common in areas around Toronto to be able to carry a mortgage on a new property for cheaper than renting a similar property. We've also seen a great deal of relaxation on down payment rules and I frequently seen 20 somethings buying a house with a 5% downpayment and having affordable monthly payments.

Of course, good luck buying in an established neighborhood.

This is the exact situation in Houston right now. There's a female co-worker of mine I talk to now and again, and it just blew my San Francisco mind when she casually mentioned that she'll be moving into a newly-built house about 10 mi. south of Houston in a couple of months. If she can do it, I can do it, by God.

Of course, then you gotta deal with commutes..........

 

[cubanb]

From the 1950s until the Japanese crash in the late 80's , they had one year where property fell in value and not by much. At the height of the boom, a strip of land in Tokyo near the Imperial Palace was worth more than all of California, boy did that change.
I do not think we will see the crash Japan saw, in some cases value fell by 80%, but I think we are due for something. The growth has been ridiculous.

 

[Doth Togo]

My belief... the newly established home communities will be the ones most affected. As gas prices go up, commutes will become more expensive. People will want to move to the urban centers where many of the jobs are located. Nobody will want to buy out in the 'burbs because it's too far and too expensive to maintain, especially after the devaluation. On top of that, the baby boomers will retire and will flood the market with their suburban homes.

Bankruptcy ownage time for the general populous.

 

[Musashi Wins!]

Well the same thing happened to Japan when they came crashing back down to Earth. Their real estate was overvalued due to really low interest loans during the bank deregulation process and also tax breaks that favored real estate investment.
The current housing growth is something that just can't be sustained. Many people are paying off only the interest on their new housing loans, but will soon find they bought above their means. Something needs to give, there needs to be some correction is any of my generation wants to own property through ways besides inheritance.
Current homeowners have enjoyed unprecedented appreciation whereas its hard for young people to even enter the market. I plan on renting until something happens, if nothing happens, I will have to leave the state to find property.

This is quite true. Also, the last suggestion you make is what will probably cause somewhat of a correction as both young people and retirees have to begin reassessing where to put those spending dollars.

I have mixed feelings about this article (especially being in the mortgage business). There are definitely areas that need a pricing correction, and some of the loans people have been taking the past few years (high risk, zero equity in their houses, etc.) are going to bite a lot of homeowners and investors.

 

[evil solrac v3.0]

Even if the market cools in only those parts of the country that Federal Reserve Chairman Alan Greenspan describes as "frothy," the U.S. has a serious problem.

alan greenspan read IGN?

 

[beto]

Noooo! I close in 2 weeks, you all shut your filthy mouths and hope prices never come down.

=(*

 

[cubanb]

This is quite true. Also, the last suggestion you make is what will probably cause somewhat of a correction as both young people and retirees have to begin reassessing where to put those spending dollars.

Definatley, I think it correlates with the .com crash, and soon after with the lowering the interest rate, people fled stocks and invested in real estate. However, just like stocks can be overvalued, so can houses. When the stock market was booming, the prices was way above what earnings from the companies could really return, it was all speculative on stock prices instead of really evaluating potential earnings.
The same thing is happening with real estate, people buying extra properties are doing so ina speculative manner instead of looking at the value of its rental income + normal appreciation.

 

[Fatghost]

This is the exact situation in Houston right now. There's a female co-worker of mine I talk to now and again, and it just blew my San Francisco mind when she casually mentioned that she'll be moving into a newly-built house about 10 mi. south of Houston in a couple of months. If she can do it, I can do it, by God.

Of course, then you gotta deal with commutes..........

Well, thats what I did. I bought a house an hour outside of Toronto and deal with the commute so I could buy without a mortgage instead of laying down 500,000-750,000K for a decent house within the city itself.

I think I made the right decision, my monthly costs are low, interest rates no longer matter to me, and I have a hell of a lot more land than I would have had in Toronto anyway.

 

[Ryck]

Damn...........My house will be completed in Nov Im barely going to be making the interest only payment...If I have no equity in two years Im bascially screwed......scary.

 

[open_mouth_]

Its a shame that some people would lose money but a part of me says "you know what... if you are stupid enough to overpay for a house you deserve what happens because you are contributing to the problem".

yeah, but what if there isn't a correction any time soon and you want to own a house in the time? What if it takes 10 years of rising (or inflated) prices before things equalize?

 

[Loki]

My aunt sold her house a mere 11 years ago for $325K. Today, it's worth over $700K according to my grandfather, who works in real estate. I'm in Brooklyn, NY for reference. My father paid $87K for our house 24 years ago, and just the other week, someone offered my father $850K cash for it. Crazy. You can't buy a house in Brooklyn for under $500-550K nowadays, and I'd say the "average" house runs around $600-650K. A two family home in any sort of decent neighborhood will run you upwards of $720K, and often as much as $1M. It's insane.

 

[heavy liquid]

A major real estate collapse would beat the shit out of anyone who had a recent perchase and was carrying a mortgage. People who bought recently but didn't have a mortgage would be OK in that they could wait out the market for prices to rise. People with high ratio mortgages would be pretty fucked though.

This is why I got into a 30-year fixed. People with adjustable rates are gonna be hurtin'.

 

[Loki]

But it's bound to happen though...but historically speaking, aren't the cycles in real estate much longer than this usually? This housing boom is only a few years old, I seem to recall the other booms lasting for a decade or longer.

My grandfather has worked in real estate for the last 25-30 years or so, and he says that this is by far the longest sustained increase he's ever seen, and also the one which has added the most value to property. Whether the length of that boom is unique to NY or not, I have no idea, but over here we've been in a boom for at least the last 7-8 years.

 

[Fatghost]

My grandfather has worked in real estate for the last 25-30 years or so, and he says that this is by far the longest sustained increase he's ever seen, and also the one which has added the most value to property. Whether the length of that boom is unique to NY or not, I have no idea, but over here we've been in a boom for at least the last 7-8 years.

Maybe the cycles are different in Canada, or my memory is a little distorted. I recall housing prices to be on a sustained upswing throughout the entire 1980s

 

[Ryck]

Its a shame that some people would lose money but a part of me says "you know what... if you are stupid enough to overpay for a house you deserve what happens because you are contributing to the problem".

Hmmm well it's not that simple, In my case I felt the same way a year ago, I was like screw buying a house I'll wait for the prices to drop only they didn't they just kept going up and now Im at a point where If I wait again and they go up again I won't be able to buy at all.

 

[Loki]

Also:

In Canada, it's never been easier for young people to get into the housing market. Mortgage rates are low, new developments are springing up everywhere and townhouses and starter condos carry for pretty cheap. It's still common in areas around Toronto to be able to carry a mortgage on a new property for cheaper than renting a similar property.

It is incredibly difficult for young people to break into the market nowadays. I couldn't believe some of the #'s my grandfather was telling me about. I had always thought (perhaps somewhat naively, because I've never had to look for property to buy ) that $50-80K was a normal downpayment on a house. He looked at me like I was crazy. He said that people were putting down $150-200K downpayment nowadays; he also related that for every $100K in mortgage that you take out, you'll end up paying roughly $600/mo for it.


So say you want to buy a $620K house (average price in Bklyn), and you have $150K to put down (which is an insane amount in and of itself, considering that the median household income in NY is only ~$40K). You'll end up paying roughly $2700-2900/mo just towards your mortgage. And that's with a low interest rate. He says that there will be a lot of foreclosures in the coming years as interest rates go up and those with "interest only" first year mortgages have to start paying the principal instead of just the interest. I'm not too well-versed on all this stuff, but what he told me shocked me.

 

[ToxicAdam]

I feel like I live on Mars.


You can get a great house in Ohio for about 130k. You can get a new house BUILT for you for around 180k-200k (4 bedroom 3 bath with basement).

 

[Drensch]

I've been saying this stuff for awhile, and as bad as it look for Californians, they get off easy. California property taxes are kept artificially low. They should be way higher.

 

[Nerevar]

I can't believe Massachusettes isn't on that list (the housing costs in the metro Boston area are worse than the DC Metro area in many ways).

Regardless, all those people getting those "interest-only" housing loans are going to get fucked by this. Hard. I don't want it to happen, but I will say I have no sympathy for people who buy above their means in the housing market and essentially are making these ridiculous "risky" investments without really thinking of the consequences.

 

[Fatghost]

Also:



It is incredibly difficult for young people to break into the market nowadays. I couldn't believe some of the #'s my grandfather was telling me about. I had always thought (perhaps somewhat naively, because I've never had to look for property to buy ) that $50-80K was a normal downpayment on a house. He looked at me like I was crazy. He said that people were putting down $150-200K downpayment nowadays; he also related that for every $100K in mortgage that you take out, you'll end up paying roughly $600/mo for it.


So say you want to buy a $620K house (average price in Bklyn), and you have $150K to put down (which is an insane amount in and of itself, considering that the median household income in NY is only ~$40K). You'll end up paying roughly $2700-2900/mo just towards your mortgage. And that's with a low interest rate. He says that there will be a lot of foreclosures in the coming years as interest rates go up and those with "interest only" first year mortgages have to start paying the principal instead of just the interest. I'm not too well-versed on all this stuff, but what he told me shocked me.

Over here, a 250,000$ house could be had for a typical downpayment of 20,000 to 50,000, and would mortgage (interest+principle in a 25 year am) for around 900to1100 a month.

Of course, you couldn't get a house for 250K in the city itself, but you could get a nice condo for that. On the suburbs, 250K will get you something nice, a small townhouse or semi-detached. In the bedroom communities, 250K will get you a nice 3 or even a small 4 bedroom house.

 

[PhatSaqs]

MD/Northern VA sucks ass.

I'd love to move right now but I just cant come to grips with paying 500K for a home when 5 years ago they were going for 175-250

 

[chinch]

while it's obvious that these interest onlyloans are going to bite people, these doom-gloomers fail to address the fact that certain LOCATIONS will sustain high home prices. They won't collapes in areas like NJ/CT where there are HIGH PAYING jobs a short ride into NYC (by train, bus, ferry or auto).

Now in Nevada, Florida, etc. yah i'd be worried if you ever wanted to sell.

In premier locations prices might dip a bit if rates climb AND the economy tanks but the same $3k/mo mortgage will be paid... the buyer might pay a LITTLE less for the actual home while paying more in interest (to the bank).

Finally they also fail to recognize the absolutely rediculous price of RENTALS and total lack of tax benefts for those who rent (instead of stretch themselves fiancially to own).

 

[Incognito]

Well, stay out of Texas. Mansions(5,000sq. ft+) run for 250-300,000k with enough backyard space for five pools.

 

[Lathentar]

Well, stay out of Texas. Mansions(5,000sq. ft+) run for 250-300,000k with enough backyard space for five pools.

It's nice isn't it.

Houston, Austin and San Antonio... huge lots for cheap.

 

[fennec fox]

It's nice isn't it.

Houston, Austin and San Antonio... huge lots for cheap.

Except I can't stand the summer.

Is there anyplace like Texas, except north? Like, Minneapolis or something?

 

[goodcow]

I feel like I live on Mars.


You can get a great house in Ohio for about 130k. You can get a new house BUILT for you for around 180k-200k (4 bedroom 3 bath with basement).

That's because Ohio is shit, and nobody wants to live there.

 

[fennec fox]

That's because Ohio is shit, and nobody wants to live there.

Amazon delivers to all 50 US states, though.

 

[IJoel]

Amazon delivers to all 50 US states, though.

:lol

 

[Drinky Crow]

I'm payin' off my mortgage with a vengeance anticipating the bubble burst. Bring it on! I'm gonna lose some serious value -- I bought at 228K and it's now 318K with this crazy appreciation -- but since my property is close to schools and freeways, I'm hoping the hurt isn't as bad for me as others. This bubble needs to pop and the speculation keeping regular folks out of convenient neighborhoods needs to end.

 

[bionic77]

Isn't this phenomenon happening in almost every developed and developing country right now?

Is there a country where real estate is not ridiculously overpriced? If this crash happens it seems like it is going to affect the entire world and not just America.

 

[Squirrel Killer]

I'm payin' off my mortgage with a vengeance anticipating the bubble burst.

Unless you have a variable rate mortgage, why?

 

[Drinky Crow]

Because I'd like to move out before the bubble bursts and keep some money?

 

[Lil' Dice]

I'm currently n the market for a house, but here in Southern California (LA area to be exact) you cannot find anyhthing decent for less than $400K. A 2 bedroom 1 bathroom house just sold around the corner from me for $560K.
HOLY FUCK.

A friend of mine who works for Countrywide says to wait for the mass foreclosures once those interest only loans expire.

 

[Fatghost]

I'm payin' off my mortgage with a vengeance anticipating the bubble burst. Bring it on! I'm gonna lose some serious value -- I bought at 228K and it's now 318K with this crazy appreciation -- but since my property is close to schools and freeways, I'm hoping the hurt isn't as bad for me as others. This bubble needs to pop and the speculation keeping regular folks out of convenient neighborhoods needs to end.

Paying off your mortgage aggressively is always a smart thing to do anyway.

 

[Phoenix]

A friend of mine who works for Countrywide says to wait for the mass foreclosures once those interest only loans expire.

VERY smart friend. There will be a lot of bargain hunters scooping up stuff at that point. I'm hoping to find some rental during the shuffle.

 

[teruterubozu]

A real estate agent here in L.A. said that the regular Joe will still be fucked when prices go down because there are hundreds of companies waiting to swoop down and grab everything when the prices start dipping.