Housing Bubble?????

HOUSING MARKET: A rise in interest rates could burst the bubble Grand Forks Herald
Ken Moritsugu
March 09, 2004

A three-year home-buying frenzy has set the soaring U.S. housing market up for a likely fall.

Driven by the lowest mortgage rates since John F. Kennedy was president, people are buying more homes in a sluggish economy than they did during the late-1990s boom. Prices have risen faster over the last four years than at any time in the previous decade.

The housing boom has been a windfall for many: homebuilders, remodelers, real estate agents, furniture and paint store owners and homeowners. In many markets, the stunning increase in home values has been the only good financial news for owners faced with slumping stocks and slow wage growth.

Yet the good times may end soon, painfully for some. Economists worry that a housing bubble may have developed, similar to the steep climb in stock prices in the late 1990s.

Federal Reserve Chairman Alan Greenspan warned again this week that interest rates can't remain so low forever. Many economists think they might start to rise late this year and next year. When they do, it will be the equivalent of sucking oxygen from a raging fire. Home sales will slow. Price increases will tail off and could reverse in some markets.

Jan Hatzius, an economist at Goldman Sachs investment bank in New York, thinks the national average home price could fall for the first time in the history of the House Price Index, which is published by the Office of Federal Housing Enterprise Oversight, an agency responsible for mortgage market oversight, and dates to 1975.

The fall, should it happen, would be a reverse of the housing boom of the last few years - a boom fueled by the simple mathematics of mortgage interest rates.

The benchmark 30-year fixed-rate mortgage stands at 5.59 percent, down from 8 percent in 2000. At 8 percent, payment on a $100,000, 30-year-loan is $734 a month. At today's rates, the same monthly payment would cover a $127,000 mortgage loan, permitting buyers to spend more on houses with the same income.

Home sales have exploded as a result, setting records for three straight years. New-home sales grew 10.7 percent in 2003, powering them through the 1 million mark. A 9.6 percent rise in existing home sales drove them over 6 million, also for the first time in history.

Sales of homes for more than $400,000 rose 8 percent last year.

For more information contact Anthony Pipitone at 312-733-4444.