Mr. Housing Bubble
According to Richard DeKaser, chief economist of National City Corp., housing markets in 53 US cities are currently "extremely overvalued" -- defined as
prices are 30% above where he estimates they should be based on historic price data, area income, mortgage rates and population density — a proxy for land scarcity.The failure of US incomes to rise much at all in the face of this housing boom is a big culprit.
in 85% of the cities surveyed, home-price gains outpaced income gains during the past year. In Bakersfield, Calif., prices rose 33% while incomes increased 3%. In 29% of areas, prices outpaced income growth by at least 10 percentage points.Low interest rates aren't getting people into these homes, either. Massive and risky debt is.
Just 2% of markets were in bubbly territory at the start of 2004, vs. 31% in the first quarter of 2005.
Nearly four out of 10 (38.1%) home buyers who bought houses in the first half of 2005 put down less than 5% of the purchase price, up from 30.6% in 2000, according to a study released Tuesday by SMR Research, a Hackettstown, N.J., firm that tracks mortgage debt. Nearly half (49.9%) of buyers put down less than 10%, up from 44.8% in 2000.USA Today was nice enough to publish DeKaser's list of metro areas, and no surprises here. Of the 20 most overvalued cities, sixteen are in California including Riverside, Sacramento, San Diego and Los Angeles.
Another potential red flag is the growing use of so-called piggyback loans.
Traditionally, home buyers who did not come up with a 20% down payment had to pay an added cost each month for private mortgage insurance. But recently, more strapped borrowers are taking out two loans - one for 80% of the purchase price and a second, or piggyback, loan in the form of a line of credit or home equity loan. So far this year, nearly half (48.2%) of buyers used piggybacks, up sharply from 19.9% in 2001.
Folks might want to up the size of those piggyback loans another $20 so they can buy an appropriate t-shirt to wear around the house: