I know – there is no housing bubble; it’s all a liberal fantasy to scare people.  At least, this is what people on the political right say.  According to one pundit on Fox news, there are a few markets that are slightly overpriced but nothing to worry about.   (The FDIC has contradicted this assessment.)  Well, the reality is there is a housing bubble and it is very dangerous for many reasons.  
Consumers – whose wages have been near stagnant after inflation for the last 5 years – have financed their spending with home equity loans.  

Instead of playing the stock market, people are now entering the world of flipping real estate – buying and selling property quickly hoping to make a profit.  This is great if it works.  However, it is conceivable a buyer could be stuck with a home that he can’t afford long-term.  

Almost 40% of the paltry few jobs created in this expansion are tied to housing, meaning a slowdown in the market could significantly lower job growth.  

In short, the housing market is the engine of this expansion.  

Now there are increased signs of it’s slowing.

In Orange County, sellers are lowering prices and inventory is increasing

The frustration experienced by sellers like Hong reflects a cooling in the market for higher-priced homes in Los Angeles and Orange counties, according to recent price and sales data. Faced with reduced buyer demand and rising inventories of unsold properties, many sellers of homes worth more than $750,000 are dropping asking prices.

Many also are taking weeks before landing buyers.

The slowdown in pricier homes is typical of the latter stages of a housing boom, analysts say, as expensive properties were the first to rise sharply at the beginning of the current cycle.

In some of the ritziest areas, such as the 90210 ZIP Code of Beverly Hills where the average home price is $3 million, sellers have cut asking prices by an average of at least 10%.

In the first half of 2004, by contrast, sellers of pricier homes typically got 5% to 10% above their asking prices.

Sales are slowing in New York:

Until recently, apartments in prime locations sold fast. Often bidding wars broke out, and the most aggressive buyer won by paying more than the asking price.

But now flats sit for an average of four-and-a-half months before a sale contract is signed. While that’s well within the normal range for a healthy, balanced market – one in which supply and demand are in sync – that’s a month longer than the process took last spring.

Mortgage rates are rising

Rates on 30-year mortgages rose this week to the highest level in 15 months while one-year adjustable rate mortgages climbed to the highest level in 4 1/2 years. Analysts expect rising mortgage rates to cool the booming housing market in coming months.

The mortgage company Freddie Mac reported Thursday that the nationwide average for 30-year, fixed-rate mortgages rose this week to 6.10 percent, the highest level since 30-year mortgages were at 6.21 percent in late July 2004.

Last week the 30-year mortgage had risen to 6.03 percent, marking the first time it had been above 6 percent since the last two weeks in March.

There is other fragmentary evidence:

The Federal Reserve’s latest beige book contained 10 references to cooling markets, up from three in the prior beige book and zero before that.

The unsold inventory of existing homes rose to 4.7 months’ supply in August, the highest since November 2003 and a marked gain from January’s 3.8 months.

Condo inventories are climbing to even higher highs – to a 5 months’ supply from a low of 3.1 months in July 2004.

The unsold inventory of new homes, after 2-plus million in housing starts for five months running, has jumped to a five-year high of 4.7 months’ supply from 4.1 months in July.

New-home price appreciation has slowed to a 1 percent annualized rate from the peak of 18 percent in October 2004.

The National Association of Home Builders index fell for a third straight month in September to the lowest level since July 2003.

Homebuyer traffic is at its lowest level since February 2004
and has been flat to down for three months in a row.

This winter could be the rally killer.  As energy prices escalate a projected 50-90%, consumers will find their thin budgets stretched further.  The Federal Reserve has spoken with a unified voice regarding inflation, implying interest rate hikes will continue through 2005 and possibly into 2006.  Consumer sentiment is low, implying fewer people will take the plunge into home ownership.  In short, there are a lot of factors indicating the slowdown will continue.

Will housing pop or simply slow?  I don’t know.  The reality is it doesn’t really matter.  While a slowdown would be preferable, it will still have strong negative ramifications for the economy.  

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