Monday, May 09, 2005

The Housing Bubble, Part 284

Okay, so maybe I've been a bit obsessed with this topic, but I just find the entire business so frightening.

Today, Dan Gillmor provided links to two more articles on the bubble, one in the Washington Post, and the other in MarketWatch. Here are some of the highlights:

MarketWatch discusses the various new types of loans that have made borrowing easier (and riskier than before). For example, loans to borrower with poor credit are increasing:

"The percentage of new loans to borrowers with less-than-perfect credit, or non-prime loans, leapt to 28% in the second half of 2004, from 15% in the first half, according to Mortgage Bankers Association, a trade group."

There are also the interest-only loans discussed in my previous post:

"Interest-only loans formed 23% of new mortgages nationwide in 2004, up from 10% in 2003, according to Loan Performance, a San Francisco-based research firm.

That percentage was much higher in some metropolitan areas: 46% of new loans in Atlanta in 2004 were interest-only, up from 32% a year earlier; other snapshots:

20% in Tampa-St. Petersburg, Fla. vs. 9%
31% in the Washington metropolitan area, up from 11%
44% in Denver, up from 17%
46% in San Francisco, up from 25%"

And now there are also teaser-rate loans:

"Then there are the teaser-rate loans, heavily advertised in the hottest home markets, where loans at, say, 2% are proffered.

These loans make more homes available to more people, but they also lead to negative amortization, with the difference between the current market interest rate and your teaser rate tacked on to your loan's principal amount."

In other words, you keep borrowing more every month!

Then there's the Washington Post article. Homeowner Gabe Klein talks about how he has used rising home values to renovate several times, and how he is now considering using his home equity to finance purchases of investment properties:

"I'm thinking I need to buy a house a year for the next 10 years and then retire," he said."

One of his neighbors quit her job to get into the real estate business:

"Jackpot" is how Ileann Jimenez-Sepulveda describes it. Like Klein, she bought a house in Columbia Heights when the neighborhood was still known more for its crime and lack of amenities than for its gentrification. But the $300,000 house she and her husband bought four years ago was recently appraised at $850,000, and that equity has changed their lives.

They used their growing equity to buy another house three blocks away and renovate it to sell it. Then they bought a house in South America, and soon they'll close on a large single-family home in the upscale Crestwood neighborhood off 16th Street NW. In the meantime, Jimenez-Sepulveda, who had worked in the high-tech industry, quit her job to join her husband in the real estate business; he's a loan broker, she became an agent. Now they encourage their clients to use the equity in their homes to buy investment properties.

Jimenez-Sepulveda dismisses the analogy she sometimes hears likening this kind of leveraged real estate investing to the frenzied investing in technology stocks of the late 1990s. She argues that real estate assets are bound to increase in value over the years, even if it's at a far slower rate than in the past few years. "

Finally, if these quotes haven't scared you yet, I've saved the best for last:

"Nick Koufos, an attorney for the Securities and Exchange Commission, is 36 and has three children. He recently did a cash-out refinance on his Silver Spring home to build a house in Pennsylvania -- to which he plans to retire someday.

"I think it's better to get it done sooner rather than later," he said. "I don't see how I could lose money."

Mark my words. Throughout history, there have been four statements that marked every bubble.

1. This time it's different.
2. The rules have changed.
3. Prices can only go up.
4. Everyone is doing it.

We have now fulfilled all four of those statements. If only I had a way to short this market....

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