Tuesday, March 01, 2005

The housing boom - a warning sign

According to LoanPerformance Inc., a San Francisco mortgage data firm, about 8.5 percent of mortgages nationwide in the first 11 months of last year were taken out by people who did not plan to live in the houses themselves, up from 5.8 percent in 2000.

For those who have owned property in the past few years the boom has brought nothing but good news. Fed rate hikes have led to a flattening yield curve as the back end rates have not risen. (This has surprised even Greenspan.) One difference between this boom and the late 80s boom is that speculation today is significantly less than what it was in the 80s. This is a very good sign for market stability and continued rise in prices. If people are living in their purchased homes, they are not looking to unload for quickly for a profit. In markets vernacular the current market isn't really 'long' because, well, they need their homes.

The article linked in the title, however, is a warning sign that real estate speculation is starting to pick up. As the percentage of folks who are buying homes but not planning to live in them grow, the market will grow 'long'. Add leverage to his mix - imagine a credit line on an existing home - and the combination can become explosive. When all of a sudden buyers can't be found, longs get desperate and start to sell. We saw that last in the Nasdaq in 2001.

This market isn't in imminent danger of being long - I would put a percentage in the statistic cited above to 18-20% before we really get into a danger zone. In the meantime if you are buying now and want to be safe, buy in good locations and not fringe 'gentrifying' areas - if the market gets very long you'll find that properties in the latter can become very hard to unload.

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