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The Machine

Another Housing Bubble Ahead?

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US house prices are being supported by cheap financing...

 

HOUSE PRICES in the US are heating up, as the flow of new homes and permits continue to steadily increase and the attraction of historically low mortgage rates motivates buyers, writes George Leong of Investment Contrarians.

 

The buyers that are driving up the housing market are not only the buyers of principal homes, but also the investors who are attracted to the relatively lower home prices and cheap financing. 

 

What is interesting is that we are seeing major buying from not only the smaller investor who may dabble in an investment property, but also the large institutions and hedge funds that are getting into the swing of things, gobbling up hundreds and thousands of properties at lower prices. 

 

The S&P/Case-Shiller index, comprising the 20 largest US metropolitan cites, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices. 

 

While the housing market is far better than it was a few years ago, when the sub-prime mortgage crisis crushed the housing market and left a trail of destruction, my view is that there may be a bubble building as much of the current surge in prices is due to the cheap money.

 

Just consider the S&P/Case-Shiller index and notice the major jump in home prices in the housing market. For example, home buyers in the Phoenix housing market saw home prices surge 23% year-over-year, while those living in San Francisco reported an 18.9% surge in home prices.

 

My problem is that much of the buying in the housing market is being triggered by low-financing costs that can inevitably get homeowners in trouble once interest rates begin to ratchet higher—and they will go higher. For instance, carrying a $100,000 mortgage will become more expensive for many homeowners who were initially able to enter into the market only because of the low rates. 

 

Even Robert Shiller, co-creator of the S&P/Case-Shiller index, is not that enthusiastic. He feels that the current housing climate is occurring in an "abnormal economy" that has been created by the money printing by the Federal Reserve. Shiller actually believes that home prices will do very little over the next decade. (Source: Napach, B., "Robert Shiller: Home Prices Will Remain Relatively Stagnant For Next 10 Years," Yahoo! Finance, April 30, 2013.) 

 

Years ago, after the last housing bubble, I said that if you have the money, go out and buy an investment property—you would be buying homes when they were cheap and, best of all, the money was cheap. 

 

So as long as the Federal Reserve continues to pursue its bond-buying program and place downward pressure on financing rates, the housing market will continue to improve. 

The worry is for when rates move higher: we may be headed for another housing market bubble down the road.

 

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At the risk of looking dumb (I don't care anymore...) what does this mean? Will my little shack be worth more than it is now, or less? Will I be able to buy/build my dream home after the rv (ha ha) for less and it will increase in value rapidly, or vice versa, will I take in the the shorts? 

 

I do want to build a nice Victorian-style home on a big chunk of land if this thing ever pops... but with the off grid amenities, solar, wind, whatever is available in my area at the time. I want lots of gardens etc, and will stay there for life, so a fast increase isn't necessarily necessary, so long as it will increase. Right now, my shack is barely worth more than what we paid 7 years ago... I'm talking, maybe $5,000 according to Zillow.

 

Thanks for the education...

 

KK

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US house prices are being supported by cheap financing...

 

HOUSE PRICES in the US are heating up, as the flow of new homes and permits continue to steadily increase and the attraction of historically low mortgage rates motivates buyers, writes George Leong of Investment Contrarians.

 

The buyers that are driving up the housing market are not only the buyers of principal homes, but also the investors who are attracted to the relatively lower home prices and cheap financing. 

 

What is interesting is that we are seeing major buying from not only the smaller investor who may dabble in an investment property, but also the large institutions and hedge funds that are getting into the swing of things, gobbling up hundreds and thousands of properties at lower prices. 

 

The S&P/Case-Shiller index, comprising the 20 largest US metropolitan cites, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices. 

 

While the housing market is far better than it was a few years ago, when the sub-prime mortgage crisis crushed the housing market and left a trail of destruction, my view is that there may be a bubble building as much of the current surge in prices is due to the cheap money.

 

Just consider the S&P/Case-Shiller index and notice the major jump in home prices in the housing market. For example, home buyers in the Phoenix housing market saw home prices surge 23% year-over-year, while those living in San Francisco reported an 18.9% surge in home prices.

 

My problem is that much of the buying in the housing market is being triggered by low-financing costs that can inevitably get homeowners in trouble once interest rates begin to ratchet higher—and they will go higher. For instance, carrying a $100,000 mortgage will become more expensive for many homeowners who were initially able to enter into the market only because of the low rates. 

 

Even Robert Shiller, co-creator of the S&P/Case-Shiller index, is not that enthusiastic. He feels that the current housing climate is occurring in an "abnormal economy" that has been created by the money printing by the Federal Reserve. Shiller actually believes that home prices will do very little over the next decade. (Source: Napach, B., "Robert Shiller: Home Prices Will Remain Relatively Stagnant For Next 10 Years," Yahoo! Finance, April 30, 2013.) 

 

Years ago, after the last housing bubble, I said that if you have the money, go out and buy an investment property—you would be buying homes when they were cheap and, best of all, the money was cheap. 

 

So as long as the Federal Reserve continues to pursue its bond-buying program and place downward pressure on financing rates, the housing market will continue to improve. 

The worry is for when rates move higher: we may be headed for another housing market bubble down the road.

 

 

Good article Machine, thanks for posting. What this country needs is jobs. Build it here, use it here, mark it with our flag so that I can EASILY tell if it was made here! I'm sure I'm not alone in saying that I would pay more for a product made here to put fellow Americans to work. With enough jobs the overbuilt inventory would fill up with family's and there would be no housing problem ever.  :)

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I heard last year the next wave of this depression will be worse than 2008. :huh:

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People would only get hurt if they have an ARM. Those that financed at a lower rate should be able to keep the same rate.

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People would only get hurt if they have an ARM. Those that financed at a lower rate should be able to keep the same rate.

Correct Frog, those who have a low fixed rate mortgage have no worries. Many years ago I was a mortgage broker and dabbled in investment properties. Low rate ARMs were my friend, but only because I knew they would be paid inside of 12 months on properties I intended to sell ASAP. ARMs are typically bad news for those who can only afford a primary home because of the ARM rate. MANY current foreclosures are due to ARMs going up and making the mortgagee unable to make the higher payments. 

 

 

Edited by MrFnHappy

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There is a time and place for everything.  I am opting for 30 year 5/5 ARM (closing next week).  Why? Because I can lock in 2.5% for the next 5 years and the most it can go up (assuming it goes up) is 2% for the following 5 years (and each subsequent 5 year period).  Closing costs on an ARM (at least at my bank) are less than half of any fixed rate loan being offered.  While I am opting for a 30 year loan (to allow for a lower payment if times get tough), I intend to pay it off in the next 8 years.  So for me, this is the most cost effective mortgage available.  In fact, had I not had a previous mortgage with my bank, they would have paid all closing costs, my first mortgage payment, and given me 100,000 points on their Visa Card.  Unfortunately, I didn't get to take advantage of that.

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F-16 Good luck with that. I suspect the bankers have a new scam to extract your wallet while you are busy trying to pay for what you purchased.

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F-16 Good luck with that. I suspect the bankers have a new scam to extract your wallet while you are busy trying to pay for what you purchased.

My bank is the Pentagon Federal Credit Union and believe me when I say that they act as though I'm trying to take money out of their own personal accounts.  I have never seen a system that tries to find every possible reason NOT to give you a loan.  I suppose if all banks had been this way, we wouldn't be in the current situation we are in now.  But holy cow, I can't see how an average wage earner could ever get a mortgage through the Pentagon.  I have outstanding credit and I couldn't believe how many different sources of income I had to use to secure this loan.

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