Hot home market a blessing and a curse

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Monday June 13, 10:57 pm ET (USAToday)


Rising home values may be making some homeowners wealthy, but lofty prices are creating a financial strain on many Americans stretching to buy a home.

Roughly one in eight U.S. households now devotes at least half their income to housing costs, says Harvard University's Joint Center for Housing Studies. One in three devotes a third of their income to housing, a tad more than banks prefer. (Related charts: What the housing market means to you)

The median price of a previously owned single-family home rose 7.7% to $184,100 last year, the study said.

"Housing affordability is a chronic problem," says the center's director, Nicolas Retsinas.

The report, The State of the Nation's Housing: 2005, is the latest proof that a rapid escalation in home prices presents opportunities and risks.

On the bullish side, the report stresses that the housing boom - fueled by cheap loans, tight supply in major metro areas and increased demand from immigrants, minorities and prosperous baby boomers - will continue in 2005.

Citing those factors, residential real estate could fare well the next 10 years, the report says.

But it also chronicles a laundry list of data that suggest some homeowners may be making bigger trade-offs than they realize.

The home-buying boom, the report says, has been spurred in large part by creative financing, such as interest-only and adjustable-rate mortgages that offer lower monthly payments in the early years of the loan.

"Some buyers are taking more risk than they think," says Tony Ogorek, principal of Ogorek Capital Management.

They could get burned if the economy worsens or interest rates rise sharply.

Other signs that home buyers may be breaking the budget:

Home prices outpacing paychecks. The number of metro areas where homeowners are paying at least four times their income for a home has more than tripled to 33 from 10 in the past five years.

Tiny down payments in vogue. In 1990, only 3% of conventional loans had down payments of 5% or less, vs. roughly 17% of loans today.

Investor purchases on rise. From 1998 to 2003, the number of loans made to investors who didn't plan to live in the house climbed to 11% from 7%.

Longer commutes. In search of cheaper digs, the number of people who commute an hour or more to work rose 3.1 million in the 1990s.

"For owners already in the real estate market it has been a great ride," says Richard DeKaser, chief economist at National City Corp. "But ... (non-owners) are increasingly being shut out or resorting to unusual means to get in."
 

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What is the main reason for this market to skyrocket...obviously supply and demand but why all the sudden?
 

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Interest rates hit a 40 year all time low is but one reason. Even with the Federal Reserve Board having raised the Fed Fund Rate 7 times within the last year and the prime rate currently standing at 6.00% and another rise expected shortly, the mortgage rates remain very low by comparison. Should they rise significantly, the housing prices will flatten.
 

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Journeyman said:
What is the main reason for this market to skyrocket...obviously supply and demand but why all the sudden?

A Republican in the White House.
 

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oldmanTED said:
Interest rates hit a 40 year all time low is but one reason. Even with the Federal Reserve Board having raised the Fed Fund Rate 7 times within the last year and the prime rate currently standing at 6.00% and another rise expected shortly, the mortgage rates remain very low by comparison. Should they rise significantly, the housing prices will flatten.
When Greenspan moves the # up the bubble will burst and it will cause something similar to the ....... com bust. That will be the time to move in and buy some properties and sit on them for a few years until the dust settles and them flip them and make some serious cash. If you were not in the game already the best position to be at now are the sidelines.
 

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mj 23 said:
When Greenspan moves the # up the bubble will burst and it will cause something similar to the ....... com bust. That will be the time to move in and buy some properties and sit on them for a few years until the dust settles and them flip them and make some serious cash. If you were not in the game already the best position to be at now are the sidelines.

i disagree!

the best time to buy real estate is YESTERDAY! (and that applies at ANY time)
 

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Yesterday I agree... but for the right kind of property. People have lost money on real estate.

Plus interest rate does matter. People got as high as 15% loans in the 70's mighta made some money when they sold, but they paid a hell of a lot more interest than if they had waited.
 

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koidog said:
Yesterday I agree... but for the right kind of property. People have lost money on real estate.

Plus interest rate does matter. People got as high as 15% loans in the 70's mighta made some money when they sold, but they paid a hell of a lot more interest than if they had waited.

true except had they waited, the price of the home would have been higher....
 

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mj 23 said:
When Greenspan moves the # up the bubble will burst and it will cause something similar to the ....... com bust. That will be the time to move in and buy some properties and sit on them for a few years until the dust settles and them flip them and make some serious cash. If you were not in the game already the best position to be at now are the sidelines.

mj23:

The Federal Reserve Board will most likely continue to increase interest rates at a slow rate in 1/4% increments because there is no indication of any serious across the board inflation taking place in the U.S. The Fed intention will be to protect against inflation in advance. Even with the 7 increases in the last year, the mortgage rates have actually dropped. Although I believe that there will be a gradual increase in mortgage rates at some point to match the Fed Fund rate increase and the subsequent prime rate increase, I don't feel that their will be an across the board bubble burst in the U.S. It will very much depend on location. Supply and demand will be the key driving force behind any bubble bursting in any particular region. Some regions will be more susceptible then others for a variety of reasons. As for being on the sidelines, real estate will always be a solid investment as it brings both tax advantages as well as future appreciation to the table, not to mention the ability to depreciate the investment over time yet generate income at the same time. It is but one of many investments one should consider when planning for future worth. Never count on making a fast dollar, but rather steady growth of one's worth through time. But, if by chance, you happen to be in the right place at the right time and obtain quick growth, consider it a bonus as there will be periods of time with no growth.
 

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Mortgage broker here for over 10 yrs and I will have to admit the rates have surprised all of us including bond traders.With Fannie,Ginnies,Freddie being so agressive with qualifying ratios.....it equals over inflated house prices and crap hitting the fan in less than 4 yrs! IE or interest only programs that many people are crossing over too, have many risk down the road when investors take back properties that are backwards on equity but there again today's 30 yr fixed 5.5%!!!!
 

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