Is the
Housing Market set to Crash in 2006?
Pressures on the national
housing market like rising interest rates and
speculative building may not have a severe
backlash on the real estate market. In fact,
according to Harvard University, house prices will
keep climbing.
by Jeanette Joy Fisher
According to a recent study by Harvard
University's Joint Center for Housing Studies
titled "State of the Nation's Housing," it appears
that although the prices of homes won't increase
at the giddy levels of the past few years, they
shouldn't experience sharp declines. The main
reason for that, according to the study, is that
most cities have curbed excessive building and
haven't seen severe job losses.
Approximately a million people bought homes last
year, using a combination of low down payment
loans and flexible financing options, in spite of
higher home prices and rising interest rates. The
majority of those buyers will have a fixed rate on
their loans, even if they're adjustable loans, for
the first three to five years. If their loans were
interest-only, the principle will begin becoming
due after a similar amount of time.
The good news for homeowners is that even though
rates are going up, the study found that only 10
percent of homeowners with adjustable mortgages
will be looking at higher house payments in 2006.
The not-so-good news, especially if you happen to
be someone who was counting on a continuation of
the runaway housing trend, is that home prices
will be slowing.
Part of the reason for the slow-down is that wages
aren't keeping pace with housing prices. The study
found that from 2001–2004, the number of American
households that spent more than half their income
on housing rose to 15.8 million, which represented
a 14 percent increase.
The Harvard study suggests that if state and local
governments don't find ways to encourage more
affordable housing, U.S. homebuyers may be in for
a difficult time in the future. With so much of a
middle-income family's income being spent on
housing, important things as IRAs and savings will
begin to fall by the wayside just to keep a roof
over their heads, which will put even more strain
on the government as people seek financial help.
Interestingly, the study also found that each
succeeding American generation has achieved a
higher percentage of home ownership, in spite of
price increases that haven't been paralleled by
increased wages and the fact that each generation
has a higher number foreign-born and minority
heads of household with a lower average income
than their native-born white counterparts. In that
light, the study suggests a need for more low and
moderate priced housing.
Perhaps most telling, the study showed that 20
percent of all mortgages in 2005 were
interest-only for at least part of the term,
another indication of how out-of-sync prices have
become compared to incomes. In fact, the study
compared the 149 largest cities in America and
discovered that the number of cities where the
median home price was at least four times the
median income nearly quadrupled from 2001-2005
(from 13 to 49).
All in all, the Harvard study would seem to
suggest that although the U.S. housing market may
be slowing down, there doesn't appear to be a real
estate crash on the horizon.
Copyright © 2006 Jeanette J. Fisher
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