Will the Housing Bubble Burst Kill our Economy

Okay, let me be the first to say that I am neither a financial expert nor an economist. But there is a trend coming that could be a harbinger of things to come.

1) Rising interest rates. Alan Greenspan, Ben Bernanke, and the Federal Reserve Board’s Open Market Committee have been slowly raising interest rates to fight inflation. It appears that there will be at least one more rate hike – maybe – but as goes the Fed so goes mortgage rates.

2) Value Appreciation. In recent years, property values and housing prices have seen a dramatic increase — and some people made a lot of money. Investors and speculators bought up properties and flipped them at a substantial profit.

Low interest rates made it easier for a lot of people to buy property. This drove the demand through the roof, without a similar increase in supply. Adam Smith’s invisible hand caused the unprecedented upsurge.

The problem is that as property values appreciated, so did property taxes. To be sure, many local governments reduced their millage rate, but that doesn’t help the individual taxpayer.

3) Interest-only Mortgages. The percentage of new homes bought with interest-only mortgages grew substantially. This is a great way to make a lot of money, if you sell the property for a profit before the principal started to come due. Given that the interest-only period for a lot of these mortgages will start soon, and at a higher interest rate too. Can you say “foreclosure”?

4) Insurance Crisis. This is something I’ve written about before – but it deserves mention here. Every homeowner is seeing significant increases in their property insurance.

5) Buyer’s Market. As interest rates started rising, the demand lessened. This means people are having a harder time selling their property.

Let’s put this all together now. Consider two types of people.

For home owners: Mortgage payments are going up for those who didn’t get a low-interest, fixed-rate mortgage… for some they are going way up. Property values mean higher taxes on newly-purchased homes. Insruance crisis means higher property insurance premiums. That means more money out of their pocket.

For potential home buyers: Houses are available, but insurance policies may not be. Most insurance companies are not writing new policies. Because of the Save Our Homes amendment, the value of most homes appraised by the property appraisers office are way below market value; that will be corrected in a big way for the new owner. If the new owner can find insurance, their mortgages will be more expensive.

The economic recovery since 2001 has been driven by two things: consumer spending and the housing market. Both of these sectors are taking a hard hit.

What does this mean for our economy?

About Jim Johnson

Editor and publisher of The State of Sunshine.
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