Real estate bubble

[Louis Proyect <lnp3@xxxxxxxxx>]

wsws.org

Soaring prices, risky mortgages
Is the US housing boom turning toward bust?
By César Uco
6 August 2005

Recently released economic data suggest that the five-year-old housing boom 
may be coming to an end. With the US economy increasingly dependent on the 
real estate sector, some experts are expressing concern that the end of the 
housing boom carries with it the danger of throwing the country into the 
greatest economic crisis since the Great Depression of the 1930s.

At the center of the danger that the real estate ?boom? will turn into 
?bust? are the new, unconventional risky mortgage products used by lenders 
to sell houses to families of moderate-to-low incomes, who otherwise would 
find it difficult to qualify for more secure 30-year, fixed-rate amortizing 
mortgages, traditionally used by working families to buy homes since the 1930s.

As the Wall Street Journal Online explains, the housing boom has been 
sustained by the ?onslaught of creative mortgage products?from 
interest-only loans to adjustable-rate mortgages carrying starter rates as 
low as 1 percent-that have allowed buyers to keep initial payments down 
even as home prices have soared.?

After these low interest rate mortgages had kept monthly payments low over 
the last three years, a first sign of a slowdown appeared when the average 
monthly payment for jumbo mortgages (loans above $360,000) climbed to 
$2,338 in the first quarter of this year, from $2,060 in the fourth quarter 
of 2004, according to a Bear Stearns analysis.

This whopping 13 percent jump in monthly payments in the short space of 
three months is just one more indication of an increasing crisis in the 
housing market, with home prices getting out of reach for average working 
families.

?In 41 out of 325 metro areas nationwide, home prices were so high during 
the first quarter that someone earning the median income couldn?t afford a 
median-priced home based on traditional lending standards.... Home-price 
appreciation outpaced income growth in 38 of the 50 states and the District 
of Columbia in the 12 months through March.... Nationwide, home prices rose 
6.7 percentage points faster than incomes during this period, according to 
the Federal Deposit Insurance Corp,? writes the Wall Street Journal.

However, in spite of signs of trouble, home sales continue to rise 
nationwide. Recently, the National Association of Realtors (NAR) changed 
?its forecast of existing-home sales to show a rise of 2.8 percent to 6.97 
million this year, setting another record.?

Surprisingly, the greatest growth is taking place in more affordable areas 
instead of the more wealthy communities, as one would expect.

In California, for example, with price growth leveling up in the more ritzy 
areas of Orange County and San Diego, less expensive areas are experiencing 
price increases above 20 percent. Consequently, to maintain the housing 
market expanding in a state where ?just 16 percent of households are able 
to afford the median-priced home,? according to the California Association 
of Realtors, lenders are relying increasingly on risky forms of financing.

full: http://wsws.org/articles/2005/aug2005/hous-a06_prn.shtml