Three articles this week on the housing bubble. The first article talks about one of the contributing factors to the bubble; the other two articles talk about changes stemming from higher interest rates.
Building the bubble
Shareholders demand increasing revenue every quarter so to keep the beast going, lenders have to keep lending. One the best borrowers are used up, lenders have to find more candidates so lenders have done many things to keep that stream of loans going, including lowering standards. Are there a lot of people out there with property that they cannot afford? Are houses "safe" investments for everyone? We will see.
Is Getting a Home Loan
Becoming Too Easy?
Lenders Seek Fewer Documents To Verify a Borrowers' Income; Homeowners, Investors at Risk
November 16, 2005
Obtaining a mortgage loan used to be an ordeal that involved retrieving reams of tax returns, pay stubs and bank statements. Now, some critics contend, it is becoming a bit too easy, putting everyone from homeowners to certain bond investors at risk.
Mortgage lenders -- competing for customers who are lazy, pressed for time or reluctant to reveal their financial secrets -- have grown much less demanding about the amount of proof borrowers must provide about their earnings and assets.
The result is a sharp rise in loans known in the trade as "low-doc" or "no-doc." These loans, which typically carry slightly higher interest rates, allow borrowers to skip some or all of the traditional requirements for verifying income and assets.
The danger is that these loans may allow some borrowers to exaggerate their financial strength and buy houses they really can't afford. If so, defaults are likely to rise, hurting homeowners, investors in shares of mortgage lenders and holders of securities backed by pools of mortgages. While rising interest rates have led lenders to start tightening their credit expectations for borrowers, the requirements for documentation are much looser than they were just a few years ago.
Turning the Tide
As interest rates rise, people are supposed to slow down on property purchases. Here is some evidence that that behavior is happening. The hope is that gradual changes will cool the market without popping the bubble. A nice idea but i think the herd mentality of investors will make a changes without a stampede difficult.
Housing Market Shows
Further Signs of Cooling
November 15, 2005
The pace of U.S. home sales is showing further signs of slowing, amid a widening gap between sellers' asking prices and the amount skittish buyers are prepared to offer, according to an industry survey, real-estate brokerage firms and housing economists.
Rising mortgage rates, higher energy costs, widespread talk about the risk of a "bubble" in housing and a surge in the number of homes on the market are among the factors behind the apparent slowdown. They have combined to make home shoppers more cautious, economists and real-estate brokers say. Buyers are taking their time to look for bargains, while many sellers have put unrealistically high price tags on their homes. That leads to a standoff, causing the number of sales to drop -- a classic ending to a period of unusually rapid house-price increases.
In a survey conducted last week, real-estate consulting firm Real Trends found that the number of home-purchase contracts signed last month dropped 8% from a year earlier at 48 of the nation's large real-estate brokerage firms. Those brokers responded to an email poll sent to 80 brokerage firms.
And more...
One of the Last Deals On Mortgages Fades
As Rates On 30-Year Fixed Loans Hit 6.5%, Some Borrowers Race to Lock In Terms
November 15, 2005
Borrowers looking for a good deal on mortgages are starting to run out of options.
For more than a year, rates on adjustable mortgages have been rising. But traditional fixed-rate mortgages have remained a remarkably good deal for borrowers -- and have also helped keep the mortgage and housing markets chugging.
Rising rates have already begun to slow home sales, economists say. Applications for mortgages to buy homes have dropped below their level a year earlier for the first time in six months, according to the Mortgage Bankers Association, which expects home sales to fall 3.5% next year as rates on 30-year fixed-rate mortgages climb to 6.75% by the end of 2006. In a survey conducted last week, real-estate consulting firm Real Trends found that the number of home-purchase contracts signed last month dropped 8% from a year earlier at 48 large real-estate brokerage firms scattered around the country.
Homeowners are expected to pull a record $204 billion in cash out of their homes this year when they refinance, according to Freddie Mac. But Freddie Mac economists expect the amount of cash pulled out to fall to $114 billion in 2006.
