December 15, 2004

WILL the Fed rate hikes put the housing bubble at risk? Quotable:
The Office of Federal Housing Enterprise Oversight reports home prices rose 13 percent in the last year, almost 5 percent in just the last quarter. This is a very large increase by historical standards. However, some areas have seen much larger increases. Housing prices in Nevada are up 36 percent in the last year. Over the last five years, prices are up 107 percent in the District of Columbia, vs. 48 percent nationally. Since 1980, homeowners in Massachusetts have seen a 566 percent rise. The national figure is 234 percent ..

A number of economists have warned lately that housing prices have increased far more than economic fundamentals would seem to justify, at least in some important markets. Economists at University of California-Los Angeles have concluded that California's housing market is in a bubble, and economist Stephen Roach of Morgan Stanley thinks much of the rest of the country is also experiencing a housing bubble. Economists at the Federal Reserve Bank of San Francisco point out that one can get some idea of whether housing prices are out of line with fundamentals by comparing them to rents. This yields a ratio akin to the price/earnings ratio that investors use to gauge stock prices. On that basis, home prices are at historically high levels that appear unsustainable.

The bottom line:
Prudence suggests that it would be unwise to buy a house in the expectation of future price increases like those we have seen. However, those planning to stay put for a few years should not suffer. In any event, all homeowners would be well advised to get out of ARM's and refinance into fixed rate mortgages as soon as possible.
Posted by Greg Ransom | TrackBack