Friday, February 04, 2005

Housing economists see bubbles, but no troubles

By Kenneth R. Harney/ Housing Update Boston Herald

WASHINGTON - Are any of the hot housing markets of New England and elsewhere in the country heading for a crash?
Two new studies offer both disquieting and reassuring answers.
On one hand, research by San Francisco's LoanPerformance Inc. finds some of the hottest markets are showing unmistakable evidence of speculative fever. One bad sign: the percentage of purchases made by investors (as opposed to people buying homes to live in) is out of whack in some locales.
Nationwide, investors made up only 8.4 percent of all mortgage customers in 2004, LoanPerformance found.
But in some hot markets, investors accounted for a far greater proportion of transactions.
For instance, in Las Vegas (2004's hottest market), investors took out 16.1 percent of all mortgages - almost twice the national average.
The bullish markets of Miami and Los Angeles also posted disproportionate investor borrowing.
Another disquieting sign: some frothy markets are heavily relying on ``interest-only'' mortgages.
These loans charge artificially low monthly payments for the first two to five years, followed by sharply higher payments afterward.
Many interest-only purchasers either can't afford mortgages at standard interest rates, or expect to ``flip'' properties for big profits before the higher payments kick in.
According to LoanPerformance, interest-only loans made up just 0.33 percent of all new mortgages in 2001.
But last year, these loans accounted for 14.5 percent of mortgages taken out in red-hot San Diego. Similarly, the loans accounted for 13.2 percent of 2004 mortgages in Las Vegas.
Do these signs mean we're in a ``bubble'' that's about to pop?
Yes and no, according to a new study by economist Michael Youngblood of investment-banking firm Friedman, Billings, Ramsey & Co.
Youngblood found that 27 markets (including Boston) have definitely reached bubble stage.
The economist defined ``bubble'' as any market where housing prices have risen much faster than per-capita income has.
But Youngblood's study also concluded that none of these markets are about to bust.
He found that even the hottest markets would only collapse if they faced four straight quarters of rising unemployment and flat or declining household income.
But so far, none of the markets has even recorded one such quarter, the study found.
That means that if any areas ultimately face serious price declines, such problems are theoretically at least a year away.
This isn't to suggest that price gains will keep humming along at double-digit rates.
On the contrary, such increases are unsustainable.
Big gains always burn themselves out by eventually making homes too expensive for all but a small percentage of potential buyers.
Instead of collapses, Youngblood and other experts predict price increases will merely slow over the next two years in even the zestiest of markets.
But fortunately, they see no price busts.