Interest Rate Roundup

Monday, January 08, 2007

WSJ cuts through the B.S. on housing speculation in hot markets

Great story in the Wall Street Journal today about just how much of the housing boom was "real" demand vs. "B.S.-speculative frenzy" demand in Naples, Florida. I can't link to the subscription-only web site. But it's worth excerpting a few passages.

"The early run-up in real-estate prices in Naples was based on strong economic fundamentals. Low interest rates, the creation of new mortgage products and a strong economy triggered a wave of home buying by making ownership affordable for the masses. And Naples was especially desirable, with its chic restaurants, impeccably landscaped streets, stretches of pristine beaches and influx of baby boomers.

But it's increasingly evident that investors and speculators here and elsewhere played a greater role than previously thought in pumping up the real-estate bubble -- especially near the end of the run."

"Economists cite individual investors for pushing prices up excessively and lenders for lowering their credit standards. Borrowers were able to purchase homes with little or no money down and often without having to verify their income and financial assets. In many areas, builders made things worse by putting up too many houses for the market to absorb."

"Many economists and housing industry executives had previously estimated that as few as 10% of the buyers in hot markets were investors. A survey by the National Association of Realtors found that 28% of buyers in 2005 were investors. At the peak of the Naples market in 2004 and 2005, as many as 50% of buyers may have been investors, local real-estate agents say."

The article generally jibes with my own thinking -- the early part of the boom WAS driven by strong fundamentals. Then it turned into a classic bubble, and I suspect the fallout will last for a long time, especially in the bubbliest markets. And there are more than a few of those -- in Florida, California, D.C., Arizona, Idaho, Nevada, Utah, and many, many other places.


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