More Housing Euphoria

I encourage you to read two housing articles: Amid Low Rates, Home Prices Rise Across the Global Village in the Wall Street Journal (subscription required), and The Trillion-Dollar Bet in the NY Times (free registration is required).

Amid Low Rates, Home Prices Rise Across the Global Village is an interesting article because it discusses how housing prices have risen across the globe with a few exceptions such as Germany and Japan, which have had -5% and -16% three year changes. But generally the low interest rates have been a worldwide impetus for increased housing prices. The three countries that have experienced the largest three year gains are South Africa, China (Shanghai), and Spain with 95%, 68%, and 63% respectively. By contrast, Canada and the U.S. are 31% and 29% respectively. But not all that goes up initially remains going up. Australia, despite have risen approximately 60%, has fallen back recently for three year gain of 56%. The worldwide gains are impressive.

The Trillion-Dollar Bet is also an interesting article because it discusses research by Deutsche Bank of New York concerning how some mortgage debt will soon be switching to adjustable payments. During the initial payments, payments are fixed, but once the fixed period has elapsed, homeowners will become subject to the vagaries of the interest rates. According to the article, by 2007 $1 trillion or 12 percent of the American mortgage debt will be switching to adjustable payments. Those who were just barely able to afford the current mortgage payments might find themselves struggling should rates continue to rise. On the left hand sidebar of the article is an interesting popup graphic. It shows the percentage of home loans greater than $360K that are interest only loans for the U.S. for 2001 and 2004. 2004 shows a very pronounced change, especially along the coasts.

I am seeing an increasing frequency housing articles warning of the inherent dangers should interest rates rise further. Housing is interesting from an investment point of view because so much of a family's wealth is tied up in their house. Should its value stagnate, or worse, decrease significantly, then how would that affect consumer spending patterns?

Housing prices should be on your radar screen.