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The Housing Bubble isn’t a Bubble- it’s a Blister.

by K.K. MacKinstry

It’s going to hurt when it pops.

Low interest rates have reflated the housing bubble by enticing buyers to enter the market or buy bigger homes while rates are low, with the looming Fed threat that rates will rise quickly.

During May 2017 debt, auto loans, and the stock market hit new irrational highs indicating signs of trouble for the unsuspecting consumer.

Credit delinquencies from the consumer are a new sign of trouble as interest rates begin to head higher.   William McChesney Martin, the longest-serving Fed chairman in the Fed’s 100-year history has said that the Fed’s job is to take away the punch bowl just as the party gets going.”

It is well know that high valuations in both real estate and the stock market encourage risk and that result in a massive correction later on. Rising home prices give consumers a false sense of security. Index’s demonstrate consumers are beginning to struggle with credit card payments.  If home prices fall as interest rates rise, this could result in a shock to both the consumer and the economy.

Low interest rates encourage leveraged consumers to spend to boost economic activity. The result is that consumer debt levels are now near $2 trillion dollars in the United States. As interest rates begin to rise, the debt burden will strain consumers as they pay ever higher rates on purchases made when rates were more enticing.  The closure of hundreds of retail stores supports the premise that the American consumer is tapped out.

Of the nation’s 20 largest cities, these seven reached their all-time market highs in December: Seattle, Portland, Denver, Boston, Charlotte, North Carolina, San Francisco and Dallas.

Mortgage rates also had an impact on inceased sales at high price points with a 30-year fixed rate mortgage today at 4.2 percent compared to the 6.4 percent market average since 1990.  However, as the Fed starts to raise rates there is a measurable slowing of home sales and price decreases that is already showing with the Fed’s last price increase.

The S&P/Case Shiller 20-city composite index, which tracks the nation’s largest cities, gained 5.6 percent year over year, up from 5.2 percent the previous month. Seattle, Portland, Oregon, and Denver once again topped the charts with the largest year-over-year gains. Seattle continued to lead the pack, rising at an annualized rate of 10.8 percent.

The Southern California real estate market is booming again.

Home prices in the region have been climbing steadily, toward record levels not seen since the 2008 housing crisis plunged the country into a severe recession.

The S&P/Case-Shiller home price index, a widely followed gauge of the market, showed that prices in the Los Angeles market in April stood at their highest point since October 2007.

The median home price in Orange County in May was $651,500, surpassing its bubble-era peak reached in 2007, according to the real estate data firm CoreLogic.

The consumer market drives the overall economy, and with rising debt service payments there is reason for concern.

The economy appears to be under the false belief that the Fed will save investors and consumers from losses.  However, at Livinglies we know better.  Consumers should not expect any relief when the housing market crashes and this time around investors shouldn’t expect a government bailout of any kind.

Filed under: foreclosure | Tagged: housing blister, housing bubble, housing market |