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As Economy Falters, Could Housing Be the Next Catastrophe?
Phil Brennan, NewsMax.com
Wednesday, Aug. 29, 2001
The housing boom continues to roll on, seemingly unstoppable even in
an economic downturn, but experts wonder if it too could topple along
with the stock market, taking accumulated home equity down along with
it.
Despite the apparent health of the housing market, now the one bright
sector in an otherwise gloomy economy, experts say there are signs
that a real-estate bust could be waiting in the wings.
Mortgage delinquencies - homeowners paying their mortgages late -fell
slightly during the first quarter of 2001, but jumped to 4.5 percent
in the last three quarters of 2000, the highest since the third
quarter of 1992, reports Charles W. Peabody of Mitchell Securities.
Foreclosures have picked up, affecting nearly one in every 100 home
loans by the end of March. Prudential Realty of Atlanta told Forbes
magazine the number of foreclosed properties it has listed has
doubled in the past year, to 25 houses - half of them with values
exceeding $250,000.
The inventory of unsold homes in the U.S., which fell steadily during
the 1990s and reached a low of 1.4 million homes last year, has
jumped upward for the first time in a decade, rising a substantial 23
percent since January, according to the National Realtors
Association.
In such healthy markets as Atlanta, Seattle, Chicago and Washington,
the pace of home sales is down 10 percent or more. And it's taking a
whole lot longer to find a buyer.
Burgeoning numbers of job layoffs threaten the ability of tens of
thousands of homeowners to keep up with their mortgages. The
government reported Thursday that 3,180,000 people are collecting
unemployment insurance. This last factor could prove deadly given the
huge increase in so-called equity loans, where borrowers take out
second mortgages against all or part of their equity in the value of
their houses. A drop in real estate values could reduce their
equities to below what they owe on the first mortgages and their
equity loans.
Moreover, financial experts say that much of the healthy consumer
spending helping to keep the economy afloat is being financed by the
proceeds of equity loans. A drop in that market could cut consumer
spending levels to recession levels.
Says Forbes, "The general assumption seems to be: Stock prices
fluctuate, but house prices just go straight up." Over the past six
years home values have shot up 40 percent in Atlanta, 54 percent in
New York City, 68 percent in Boston, 71 percent in Denver and 100
percent in San Francisco, according Case Shiller Weiss in Cambridge,
Mass, a research firm. Could the idea that this upward trend can
continue indefinitely be wrong, Forbes asked. "If it is, a large part
of the economy is in danger. A burst of the housing bubble wouldn't
just hurt homeowners and people who own shares of Fannie Mae or Toll
Brothers. It could end up squeezing all Americans.
A real estate slump 'could make this little recession we're having
turn into something that's quite drawn out and serious,'" Yale
economist Robert Shiller told Forbes. Shiller - a longtime student of
the real estate market - thinks consumer confidence could take a
bigger hit from a real estate crash than from the stock market
correction, Forbes reported.
"It was the boom in housing, he argues, more than the Nasdaq's 175%
runup in the 18 months leading up to March 2000, that made consumers
feel so flush and spend so freely. Go back as far as 1975 and compare
ebbs and flows in retail spending in all 50 U.S. states and 15
foreign countries, and it is clear housing markets directly affect
consumer spending, while stock market fluctuations don't, he says."
Shiller told Forbes he worried about "an ominous mix of
overdevelopment, inflated home prices and rising consumer debt. Add
two other factors that historically have presaged a big drop in home
prices - the plunge in stocks and massive layoffs - and the case for
a crash gets stronger."
The effect of layoffs on the housing market is no more obvious than
in California's Silicon Valley, where the crisis in high tech has
driven real estate prices sharply downward. Santa Clara County has
four months of housing inventory for sale, triple the levels carried
in the past three years, officials at Creekside Realty in San Jose
told Forbes. The real estate market has been in the dumps there since
the beginning of the year, the Realtors said.
In New York, houses and condos are sitting on the market longer
without buyers. In the first half of 2001, properties in Manhattan
were on the market an average of 132 days before they were sold, up
from 118 days last year, Forbes reported. Real estate sales are down
19 percent since the beginning of the year.
Where is all of this leading? Forbes notes that the ratio of mortgage
debt service to total disposable income climbed to 6.46 percent in
the fourth quarter of 2000, surpassing a 6.35 percent record set
during the first quarter of 1991 in the depth of the last recession.
In the first quarter of 2001 half of all households that refinanced
incurred debt at least 5 percent larger than the original loan. That
cash has been helping to finance such consumer goods as sport utility
vehicles and big-screen TVs, all of which is great for the consumer
economy but, Forbes warns, is a potential calamity if housing values
drop or even plateau. "Collective owners' equity in the U.S., as a
percentage of the real estate's value, sank to 55% in the first
quarter of this year, the lowest level ever and down from 70% in
1982. 'Leverage [such as equity loans] against an asset that can
deflate in value is a recipe for disaster,'" Peabody told Forbes.
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