The Corner

WaPo: Fear the End of the Real-Estate Bubble!

Washington Post real estate correspondent Dina ElBoghdady warns of the coming real-estate collapse in an article that starts with this sentence:

“The super-low mortgage rates that tens of millions of Americans locked in during the refinancing boom are now discouraging many of these borrowers from buying another home and giving up those loans.”

Is the subject of that sentence “mortgage rates” modified by “super low”? If so, how can super-low mortgage rates be discouraging borrowers from going deeper into debt?

ElBoghdady, whom last we met gathering wool on the high rate of re-defaults in the Home Affordable Mortgage Program, plucks a string here she has strummed in the past: The solution to the puzzle is a “lock-in” effect claimed by the Institute for Housing Studies at DePaul University. Here is the research brief [pdf] and here is the working paper [pdf] on the lock-in concept. The idea is that if you’ve locked in a superlow rate, you will now turn up your blue nose at anything higher. ElBoghdady finds a couple who are undecided about whether to do another heap of living in the same old house:

Ella Lore said she and her husband are fence-sitting. Now that their daughter is studying abroad, they would like to sell their D.C. home, buy a two-bedroom condominium and rid themselves of the hassles and costs of maintaining a large home.

But when they did the math, they discovered that they would be paying about the same amount each month for considerably less space partly because of rising mortgage rates, Lore said. The couple refinanced into a loan with a 2.8 percent rate in 2012. Now, with a new loan, they’d get a 4.25 percent rate.

Now yard-sale economics holds that the Lores should hold onto their home rather than buying a condo, because after they have sold off everything else they will still have a yard to sell. I often wonder what real-estate agents would do if they interpreted their fiduciary duty to include truly advising listing owners to do things in their own financial interest. In many cases they would advise people not to get divorced, to rent rather than buy, not to downgrade from a house to a condo, or not to pony up more than enough money for their kid to have one semester abroad.

The Post piece is notable mainly for its inflationary rhetoric (and Page One treatment). The fear is that rates could this year reach “just shy of 5 percent by year’s end on a 30-year, fixed-rate mortgage and hit nearly 6 percent by the end of 2015.”

The interest rate for that type of loan was higher than 5 percent in 2010, when the reinflation of the stock and housing markets began in earnest, according to Freddie Mac’s history. Near the peak of the previous real-estate bubble, in 2005, the 30-year fixed-rate mortgage was 5.71 percent. In March 2000, at the crest of the Clinton boom, the 30-year rate was 8.15 percent. In June 1987, as the Reagan boom approached zenith, the 30 was at 10.54 percent. (Freddie Mac is a government-sponsored secondary mortgage entity that was taken under Treasury Department conservatorship in 2008.)

House prices have reinflated since the trough of the partial real-estate correction that began in June 2006. Home equity is once again a majority of real estate owned: According to the Federal Reserve’s Flow of Funds reports, more than 55 percent of real estate owned is equity rather than debt. This is the highest it’s been since 2007.

Also notable: The 2006–2010 correction was not allowed to run its healthful course of putting house prices back into their historical ratio with household income. The U.S. median home price, which well into the 1990s rarely exceeded a multiple of three times median income, was more than four times median income as recently as 2011, and real estate prices have only puffed up since that time. Yet the Post would have us believe deflation can’t be allowed to happen. In fact, the Post’s logic here is that even a lull in the reinflation of real estate would endanger a “robust housing market.”

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