House Market Bubble

The housing market in the US appears to be in bubble mode. People who knew nothing about real estate 5 years ago are now jumping in hoping to get rich off quick off of rising housing prices.

What makes this get-rich-quick formula more dangerous is that many investors are willing to buy properties on which the rent is too low to pay for financing and other monthly costs. Their bet is that rising property prices eventually will make these deals profitable.

The Economist is already writing an article "After the Fall", because they have been writing about the bubble for a while now.

According to Economy.com, Americans pulled out roughly $705 billion of equity from their homes last year, up from $266 billion in 1999.

That is a large increase and helps to explain how Americans keep spending so much. I believe that GDP growth in '04 was around $300-400 billion, so it could be argued that all the growth was just put on the credit card of escalating housing prices.

So mortgage borrowing has grown even faster than home values have. As a result, homeowners' equity as a percentage of the market value of all homes declined to 56 percent at the end of 2004 from 57 percent five years before, according to data from the Federal Reserve.

I am surprised that the equity number is about the same. Would have thought it would drop as people use more leverage. But, when the bubble pops I bet it goes way down.

This is a good article, so I would recommend reading the whole thing.
Via Pittsburgh Post Gazette via the Wall Street Journal