The Great American Housing Boom

[kentuck]

Report from the Center for American Progress:

Dark economic clouds are gathering ahead. After six years of booming home prices, the great American housing bubble has finally popped, and the market is now on the verge of collapse. Tens of millions of families who bought homes at bubble-inflated prices "now face the prospect of seeing their life savings disappear." This development will have wide-ranging effects on the American economy. "Over the last few years," writes Princeton economist and New York Times columnist Paul Krugman, "most good U.S. economic news has been the result of soaring home prices." With this engine of economic growth now broken down, America faces a potential future of "rapidly falling house prices, rising default and bankruptcy rates," lost jobs, fewer consumption, even a possible recession. The dark clouds ahead may be a perfect storm hitting the U.S. economy. (Read "The End of the Great American Housing Boom," a new report by American Progress Senior Economist Christian Weller.)

THE GREAT AMERICAN HOUSING BOOM: Over the past decade, home prices in the U.S. have climbed to never-before-seen heights. Traditionally, home prices tended to rise at the same pace as rental costs (since both reflect the price of a roof over one's head). In 1975, the home price index was equal to 108 percent of the rent index. By 2000, the ratio of home prices to rents had jumped above 130 percent for the first time. By the beginning of 2006, the ratio of home prices to rents had grown to a whopping 178 percent. Similarly, home prices compared to other prices remained relatively stable until 1999, when the ratio of home prices to other prices surpassed all previous ratios and grew to 208 percent at the beginning of 2006.

[OneBlueSky]

1. got a link? . . . n/t

.

[kentuck]

2. I receive the report via email...

Sorry.

[sutz12]

3. I have heard...

(sorry, no link) that much of the last 5 years, as much as 40-50% of the bubble, has been people buying 2nd and 3rd homes. In other words, wealthy people investing. First time buyers have been stagnant.

[Warpy]

6. That is true for part of the market

Here in central NM at the height of the craziness a year ago, vanloads of wealthy Californians were descending on new construction sites. Californians alone had been buying up 1/4 of all new construction in this town and allowing the houses to sit empty, waiting for them to appreciate so they could cash out. A full third of new housing was bought by speculators. (Source: Albuquerque Journal a little over a year ago)

This area has been laughably overbuilt. Since there are people moving here all the time, that housing will eventually be occupied, but nervous speculators trying to dump it on the market to get out for whatever they can salvage will continue to drive down prices in this area. ARM foreclosures likely wouldn't have caused prices to fall. Overbuilding and selling to speculators will.

[fuzzyball]

4. Why people ask for links for news which is all over the media...

Yes, the housing price boom has finally been pricked.
I wondered what took it so long since the affordabilityfactor has been deteriorating for several years.

What caused the housing boom was the ridiculously low
interest rates set by the Federal Reserve Bank post 911.
The speculators then jumped in to make it a bubble.

[leftofthedial]

5. the explosive growth of this bubble

was fueled by predatory lenders (Joe Biden's bestest buddies)

[spooky3]

7. Per NPR interest rates have dropped about 1 %-age point since

last summer. The report aired yesterday suggested that as long as they have stable employment etc., many people who originally took out risky and creative mortgages can now refinance into more conventional loans. That's, of course, if their home value hasn't dropped so much that the amount financed would exceed the mortgage value. But my guess is that in many markets people can seize this opportunity and I hope they do. The falling housing prices are a good thing for more people.

[sutz12]

8. But I think a lot of people are going to lose their shirts...

Much of the recent bubble also involved all of that creative financing, which is going to hurt some people when they try to get out. Much of the 'value' of the current bubble is all froth, people cashing out equity for more spending.

I think this is going to get ugly. Our whole economy now is based on borrowing, much of it with the albatross of predatory lending practices with usurious interest rates.

They were planning ahead last year when they modified the bankruptcy rules.