Bubble? Froth? Fermenting opportunities for the Buyer!

by Peter Fyler, October 7, 2005

"That's right, I said it: Frothy!"

I've been saying all along that I do not believe we are in a “bubble”, and it is Fed Chairman Alan Greenspan who is now coining a new word to describe activity in the housing market --- “frothy”. I was reading an interesting article the other day about the national real estate market. I wanted to share some of it with you here.

A survey by RBC Capital Markets, an international corporate
and investment bank, determined that nearly 60% of U.S. homeowners are confident that the value of their homes will increase
at least 5% annually during the next seven years. They have little concern for a so-called housing bubble. However, as we are seeing in the New England area, there is a slowing down of real estate gains as well as falling housing prices, ultimately affecting people’s spending habits.

NAR (National Association of Realtors©) stats show the index
in the West rose 7.6 percent to 136.7 in August and was 8.7 percent higher than August 2004. The index in the Midwest increased 2.8 percent to a level of 119.4, and was 0.5 above
a year ago. In the South, the index rose 2.2 percent to 142.1, and was 7.6 percent higher than August 2004. The Northeast index declined 0.5 percent to 108.5 in August, and was 2.2 percent lower than a year ago.

Greenspan recently said, over the past decade the market value of owner-occupied homes consistently rose at an average annual rate of about 9%. Home mortgage debt associated to these homes rose at an even higher rate. I think the real concern; according to Jim Kennedy of the Federal Reserve Board is that discretionary borrowing of home equity accounts for about four-fifths of the rise in home mortgage debt. The gap has narrowed in terms of loan to value ratio and that is of critical concern should mortgage rates go up. The unprecedented low level of mortgage interest rates has been the driving force behind this discretionary borrowing caused by a confidence in the dramatic rise in home prices in many areas of the country. The low interest rates have also fueled the increase in new housing starts as well as the increased turnover rate in existing homes.

I though it was interesting to note that they are saying a substantial part of the increased turnover rate is due to purchases in the second home market. The majority of these purchases being for vacation or investment purposes. Home Mortgage Disclosure Act (HMDA) statistics show that mortgage originations for second-home purchases increased from 7 percent of total purchase originations in 2000 to twice that at the end of 2004. It is suggested that second home purchases are more speculative in nature and not limited by concerns of owner relocation. More of these homes are paid for wholly in cash. It is believed that the number of second home and investment sales is at unprecedented levels and that is what is contributing to the rise in home prices.

What does all this mean? Who knows, but to me it means --- you as a buyer may have an opportunity at this moment resulting from the perceived slowdown in speculative purchases and seller’s fear that we are at the top of the market and they are not going to realize their anticipated gains.

This article is the express opinion of Peter C. Fyler and may not be reprinted or used without his permission.