Long Treasurys bottomed at 4.05 percent last week as the
GM-Ford-junk-derivative-hedge mini-panic faded; they are now 4.13 percent,
mortgages mostly holding 5.626 percent.
The economic data were benign: core producer prices rose .3
percent in April, but core CPI was unchanged. The nominals, up .6 percent and
.5 percent were dismissed as residuals from now-fading energy costs; oil stayed
under $50/bbl all week. Industrial production was on the weak side, minus .2
percent, and capacity in use fell .2 percent to 79.2 percent.
However, housing starts and new permits in April roared back
from a weak March, up 11 percent and 5.3 percent, which leads to the following
Housing Bubble rant.
The financial press is now on official Bubble Watch; CNBC
might as well have a bubble ticker scrolling along with stock prices, and the Wall
Street Journal last week ran four prominent Bubble-related stories. One had
some merit, arguing The Bubble as an artifact of too easy mortgages.
The first aspect of too easy is too low, as in rates. In the
last four years, fixed-mortgage rates have been on a centerline of 5.75 percent,
down from 7.75 percent through the 1990s. Thirty percent of a $100,000 annual
income committed to a mortgage payment ($2,500/mo., less $350 for TI = 2,150
for PI) at 7.75 percent used to borrow $300,000. Today, at 5.75 percent, it's
$368,000. That 20-ish percent increase does not explain the 49 percent increase
in U.S. home prices since 1999.
However, convert to interest-only, increase the TI to $400
for a more expensive house, and the $2,100 remaining for interest at 5.75
percent will borrow $438,000. That 30 percent interest-only increase, even with
post-90s income growth, does not explain the 102 percent five-year run in
California, or 112 percent in D.C., 99 percent in Rhode Island, and 75 percent
How about no-proof-of-income lending as supercharger? If
that were so, we would have seen a surging entrance of buyers previously shut
out of the market. Not so; rates of home ownership are steady.
I have no doubt that low rates and easier underwriting
(enlightened, says here) are the cause of some of the price run-up; nor doubt
that interest-only loans are now facilitating higher prices. However, to be a
bubble, home prices must be unsustainable; for foolish mortgage terms to be the
culprit, mass default would have to be in prospect.
There is no evidence whatever that home prices are
unsustainable, nor any evidence of widespread default. The bubble is in
commentary coming from the financial markets, and the gas inside is envy.
After foolish lending and borrowing, the market types'
critique of housing: too many investment and second-home purchases. Must be
dangerous speculation. Prices are unsupported by buyer income or market rents.
Tisk, tisk. The Fed should put a stop to this. Call in the regulators.
That line of argument sets a record for hypocrisy. You
stock-market guys, the ones who gave us the biggest bubble in financial
history, are suddenly the Bubble Cops? High prices versus lower incomes and
rents? That's what you call a "healthy price-earnings ratio." Riding
prices up is a crime? In your market, you call the same thing a skill, "momentum
investing," and "market timing." Millions of American families
are taking advantage of an epic demographic mis-match of land versus 3 million
new Americans every year; you call them irresponsible Bubbleheads, while the
exact same behavior among yourselves is called "value investing."
Financial-market people have a fit when clients announce
they are withdrawing capital to put it in real estate: "Uh-oh. Bubble!"
Say the same thing to them about their products and they will hang up on you.
Stocks have staggered in their tracks since 1999; it is the soul of prudence to
re-allocate some assets to a better market.
The truth hated most by stock-jockeys: invest in a home, and
even if you're wrong about prices, you get to live in it. Try that with an
Enron stock certificate.
Lou Barnes is a mortgage broker and nationally syndicated
columnist based in Boulder, Colo. He can be reached at [email protected].
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