Homeowners Expect Prices to Keep Rising By Tom Petruno and Kathy M. Kristof Times Staff Writers
March 8, 2006
Americans remain largely optimistic that home values will keep rising in the next few years, but some are concerned that they won't be able to keep up with their mortgage payments, according to a Los Angeles Times/Bloomberg poll.
More than one-quarter of those who have adjustable-rate mortgages say they aren't sure they'll be able to make their monthly payments if their interest rate goes up. These loans have been particularly popular in California and other states with high housing costs.
Homeowners' views in the new nationwide poll show widespread faith in the real estate market, despite signs that prices and sales are cooling. The median price of existing U.S. homes sold in January was $211,000, down from a record high of $220,000 in August.
In the Times/Bloomberg poll, nearly half of homeowners expected the price of their primary residence to rise 5% to 15% over the next three years. Twenty-five percent expected appreciation of 16% or more in that period.
Just 5% predicted no price increase.
"I think the 'bubble' talk is hyped," said Diane Harvey of Foster City, Calif., in a follow-up interview after the poll. She and her husband, David, have made a business out of buying and selling houses in the Sacramento and Phoenix areas for the last 2 1/2 years.
Harvey, 66, said she believed that the market had entered a slowdown but that over time, the growth of households and the lure of Sun Belt living would shore up prices in the regions where she and her husband had invested in homes.
The Times/Bloomberg telephone poll surveyed 2,563 adults on their personal finances and their views of financial markets and investment opportunities.
Asked about the short-term trend in house prices, 36% of all respondents — homeowners and renters — expected homes in their neighborhood to increase in the next six months, while 49% expected prices to stay the same.
A minority of 14% predicted a decline in prices in that period.
In the West, 43% of respondents predicted rising prices in their neighborhood in the next six months, the highest percentage among the nation's four major regions. The figure was 29% in the Midwest.
The poll, which was conducted Feb. 25 through Sunday and has a margin of sampling error of plus or minus 3 percentage points, also revealed unease among some homeowners about their ability to hold on to their property.
About 1 in 7 homeowners said the mortgage on their home was an adjustable-rate rather than a fixed-rate loan. Adjustable-rate loans typically offer low initial interest rates, making homes affordable for many people who couldn't qualify for fixed-rate mortgages.
As market interest rates rise, however, homeowners with adjustable loans face the prospect of sharply higher payments.
Of those who have adjustable-rate loans, the poll found that 21% said they were "not too confident" about making their payments if they adjusted higher. Five percent said they were "not at all confident." The rest were "very confident" or "somewhat confident."
Lillie Oliver, 50, of Alvertville, Ala., said she got an adjustable-rate loan a few years ago when she refinanced her house to pay for improvements. But her loan rate recently jumped a full percentage point, and it could adjust again in six months, she said.
"I'm at the point right now where I can barely make the payments," Oliver said. "If everything keeps going higher, like groceries and everything, I don't know how I am going to make it."
Jackie Arnold, 41, and her husband used an adjustable-rate loan to buy a home in suburban Atlanta 18 months ago. Now, as interest rates rise, she's worried that the loan may have been a mistake.
"Our dilemma is, do we sit on the [loan] that we have and wait … or do we refinance now and pay considerably more right away?" Arnold said. "We are caught between a rock and a hard place."
Some consumer advocates say home buyers haven't been fully aware of the risks involved with adjustable-rate mortgages.
Homeowners with "substantial income or assets could well weather the storm of higher payments on these loans," said Stephen Brobeck, head of the Consumer Federation of America. "But we know that a fairly high percentage of people who have taken out these exotic loans aren't in that situation."
In California, an estimated 25% of so-called prime mortgages issued in 2005 were adjustable-rate loans, compared with 13% nationally, according to data firm LoanPerformance. Prime borrowers generally have the best credit ratings, but over the last two years even these customers increasingly have taken out adjustable loans that allow them to pay artificially low interest rates for months or years. When these loans eventually adjust higher, many consumer advocates fear, some borrowers won't be able to make their payments.
Still, with most homeowners enjoying the relative safety of fixed-rate loans, and with home prices up significantly in nearly all regions in recent years, the allure of residential real estate as an investment remains strong, the poll indicated.
Asked how they would invest most of a $1-million windfall, 36% of respondents picked real estate. The next-most-popular investment was mutual funds, named by 13% of respondents.
for more: http://www.latimes.com/business/la-fi-poll8mar08,0,1455490.story?coll=la-home-headlines
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March 07, 2006
Is Dave Leonhardt A Renter? by Paul Kasriel
David Leonhardt, a journalist at The New York Times, wrote an article in the March 1 edition entitled "Don't Fear the Bubble That Bursts" (http://www.nytimes.com/2006/03/01/business/01leonhardt.html). He's advising homeowners not to fret too much about the prospect of declining value of the principal component of their net worth. He bases his laid-back argument on the bicoastal experience of the early 1990s' housing bust.
According to Leonhardt, homeowners ought not to be as concerned about a potential 2006- 2007 housing bust as real estate agents should. But this is partial-equilibrium thinking on the part of Leonhardt. As many of you know by now, Asha Bangalore, my colleague, has documented that about 40% of the feeble job growth in this current recovery/expansion has been housing related. Housing related would include real estate brokers. I reported a couple of weeks ago that Washington Mutual Inc., one of the nation's largest residential mortgage lender, had announced that it was closing ten (or 38%) of its loan processing centers, which would result in a 2,500 person staff reduction. Well, in the grand scheme of things, 2,500 workers is not even a rounding error. But we have not yet experienced the housing bust, five consecutive months of declining used home sales notwithstanding. But if we do have a housing bust - and we likely will if Bernanke does not soon declare a ceasefire - then a lot more than a rounding error of workers could be lining up for unemployment insurance. The cutback in spending by these unemployed would have a, excuse the Keynesian expression, multiplier effect on total spending in the economy - adding some homeowners not associated with the residential real estate industry to the length of the unemployment lines.
Today housing is indirectly playing a much larger role in funding expenditures on consumer goods and services than it did in the late 1980s. As shown in Chart 1 [no charts included here], in the third quarter of last year, households extracted equity at an annual rate of $633 billion, representing 7.0% of their after-tax income, from their houses. In 1989, home-equity extraction totaled only $82 billion, or 2.0% of after-tax income. If house prices were to level off, consumer spending would be adversely affected because the "home ATM" would not be refilling. If house prices were to fall - well, I don't even want to think what would happen to consumer spending. A slowdown in consumer spending emanating from a busted housing market would lead to an increase in unemployment, which would have further knock-on effects (Keynes was a Brit, wasn't he?) to consumer spending and unemployment. Again, our smug homeowner might find himself in the unemployment line.
In recent years, increases in household net worth have been significantly boosted by the appreciation in residential real estate values. For example, in the first three quarters of 2005, the appreciation in the value of residential real estate accounted for 58% of the increase in household net worth. In contrast, back in 1989, real estate appreciation accounted for only 24% of the increase in household net worth. If a housing bust occurs in the next couple of years and a stock market boom does not begin, households, who in the past ten years have depended primarily on asset-price appreciation to boost their net worth might have to resort to spending less than they earn to get the job done. But if households cut back on their spending, those unemployment lines will lengthen unless some other source of demand appears quickly.
While I'm on the topic of household net worth, residential real estate now accounts for a record 37-1/2% of it - about 5 percentage points more than it did in 1989 (see Chart 2). I don't know about you, Mr. Leonhardt, but I am more inclined to spring for a night on the town when the principal component of my net worth is going up in value rather than down.
Housing today is more highly leveraged than it was in 1989, just before the last bicoastal housing bust occurred. As shown in chart 3, today the housing leverage ratio is about 43%. In 1989, the leverage was about 35%. So what? So, as shown in Chart 4, between 40% and 50% of new mortgage debt applied for in the past two years has had an adjustable-rate element to it. Back in 1990, only about 10% of new mortgage debt was of an adjustable rate nature. A lot of these adjustable-rate borrowers in the past two years are in the "sub-prime" category or are speculators. In either case, they probably have little equity in their homes. It has been estimated approximately $600 billion of sub-prime adjustable rate mortgages will reprice over the next two years. Chances are they will reprice at higher interest rates, not lower ones. Chances are mortgage defaults will be on the rise with these repricings. This will put "repos" on the market, which will depress home prices. Speculators, with negative cash flows and slower or no appreciation in their investment properties, also will add to the glut of homes for sale.
Again, so what if mortgage defaults are on the rise? No biggie except that, as shown in Chart 5, U.S. commercial banks have a record exposure to the mortgage market. About 62% of bank earning assets are mortgage-related. (I do not have access to the data to determine what part of this mortgage exposure pertains to commercial properties). What I'm driving at here is the potential for a bust in housing to cripple the banking system. History tells us that a crippled banking system renders central banks less potent in combating economic downturns and promoting robust recoveries. In other words, if a housing bust led to large credit losses to the banking system, Chairman Bernanke could cut the fed funds rate to 1% and be surprised that a low interest rate did not have the same magic for him as it had for his predecessor.
Mr. Leonhardt sees a silver lining in a housing bust. It will give renters a lower price point at which to become homeowners. Yes, unless they are in the unemployment line too.
Paul L. Kasriel, Director of Economic Research The Northern Trust Company Economic Research Department 50 South LaSalle Street, Chicago, Illinois 60675 -- Jim Devine / "There can be no real individual freedom in the presence of economic insecurity." -- Chester Bowles