Housing
market boom ending, profits found elsewhere
Sterling
Harris
On
Tuesday, the Federal Reserve voted once
again to raise lending rates by a quarter
of a point to 3.75 percent. It’s
the highest rate since June 2001, and
it’s the 11th consecutive time
the Fed has voted to raise rates.
Many financially educated observers view the move as part of a growing attempt
to curb inflation. They go on to point out the Fed is showing a tremendous
amount of confidence in the economy by raising rates in the wake of the disaster
in New Orleans.
It also appears rather obvious at this point that the end is in sight for the
fabled boom in real estate. Although the case against higher home prices should
be obvious, every bull market seems to cast a peculiar spell on both novice
and professional analysts.
The effects of this peculiar spell cause normally sensible people to lose their
minds as they proclaim you can’t lose money in real estate or that the
new information economy is going to replace the old commodities-based one.
Such proclamations always turn out to be false, as everybody seems to forget
the fact that the market is cyclical.
Moving back to the reasons why the housing market is on shaky ground, we see
the average American is up to his eyeballs in debt, with personal savings at
an all-time low.
While the Fed may be tightening the belt now, what preceded
was a remarkably long period of low interest rates coupled with irresponsible
levels of debt spending by American consumers.
Over the past several years, we have witnessed the popularization of a vast
array of questionable lending schemes designed to entice Americans to spend
more while saving less.
Adjustable rate mortgages with attractive initial rates
have made more than half of all new homebuyers susceptible to rising interest
rates.
This could produce a “spectacular wave of bankruptcies,” notes
Stephen Roach of Morgan Stanley.
To add to the danger, banks offer a “home equity line of credit,” causing
many people to use their houses as ATM machines, withdrawing money as the value
of their property rises.
The problem here is all of the equity that the homeowner
is drawing out of his house is theoretical — it only exists on paper.
If home prices were to sink, many homeowners would be on the hook for more
than the value of their houses.
It’s important to consider the impact that rising property values and
the associated rise in consumer spending have had on the economy.
The U.S.
economy has come to rely on the real estate sector to stimulate consumer spending,
which accounts for 66 percent of economic growth.
In a sense, the bubble in
Internet stocks never really burst, it just migrated into the housing sector.
The coming collapse of the housing market is going to bring economic difficulties
to many Americans, but few will profit. Unfortunately, people are always there
to take advantage of the misery of others.
Any sagacious reader who heeded my advice in these pages last year could have
made handsome profits on the inevitable rise in oil prices.
It is certain there
will be a few who will play falling home prices to their favor this time around.
Sterling Harris is a junior electrical engineering major.
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