mnot’s blog

Design depends largely on constraints.” — Charles Eames

Wednesday, 30 June 2004


More on the Housing Bubble^H^H^H^H^H^HMarket

HSBC has apparently been indiscreet enough to call it a bubble, but I can’t find the actual report (“The U.S. Housing Bubble — The case for a home-brewed hangover.”). Anyone have a link?

Prices are 10 to 20 percent too high and can overshoot on the way down. […] We think the party stops by mid-2005. A series of rate hikes will cause a reassessment of likely future house price risks and its associated debt, thereby triggering housing’s fall.

Morgan Stanley likewise has some doubts, including this gem:

Although market interest rates had fallen to 40-year lows, debt service burdens remained near the upper end of historical experience, according to the Federal Reserve. It is also common to believe that rational consumers have locked in fixed rate debt in funding their wealth effects — in effect, securing a guaranteed insulation from any back-up in interest rates. The recent shift to adjustable-rate rate mortgages draws this assertion into serious question; the ARMs portion of the dollar value of new mortgage origination exceeded 50% in May 2004, well in excess of the 20% share prevailing in early 2003.> Courtesy of the Great Bubble of the late 1990s, the American consumer discovered the sheer ecstasy of converting asset holdings into spending power. Households learned to spend beyond their means — as those means are defined by growth in disposable personal income. Yet when the equity bubble popped, the consumer never skipped a beat. There was a seamless transition to another asset class — property. And the joys of asset-driven consumption continued unabated. Income-based consumption had, in effect, become passé, and American households went on an unprecedented debt binge. No one seemed to care that the personal saving rate had fallen from 5.7% in the pre-bubble days of early 1995 to 1.0% in late 2001 (and now stands at just 2.3%). In the asset economy, who needs to save out of his or her paychecks? Who needs to worry about debt?

Emphasis mine. I think that housing prices here are now at least partially predicated on ARMs; most people can’t afford to get a decent house with a fixed-rate mortgage any more.

Meanwhile, the NY Federal Reserve Bank busily chants “ nothing to see here, move on…

One Comment

gopower said:

You neglect two things:

  1. Most ARMs come with protected periods of up to several years before the initial rate can be raised.

  2. As home-ownership has reached record highs, the composition of new owners have changed. Many people are seizing on historically low interest rates to grab a home now – a condo or modest starter home – instead of waiting for their dream home. They fully intend to stay only a few years, i.e., they’ll sell before their adjustable rate mortgage goes up.

Bottom line: Rising Fed rates will have minimal effect on those who already have their mortgages, ARM or not.

Tuesday, July 20 2004 at 6:57 AM