Aug. 17, 2005 - When Housing Booms Go Bust

Once again the Wall Street Journal (subscription only) is giving considerable press to the housing/mortgage boom and the potential looming problems when it goes bust.

Today's edition has three major stories all starting on page B1:  How Will Home Boom End?, Lessons From Busts Gone By, and Near Nation's Capital A Hot Market Cools.

Here's a synopsis for you that highlights some of the same issues I've raised in prior posts (see The Lender's Slave, Playing With Mortgage Fire, and Exotic Mortgages & Hot Real Estate).

First the good news.

The main point is that housing booms don't normally end with sudden meltdowns like the stock market sometimes does.  Instead, it is usually a drawn out process over many months or even years.  The reason is that it takes time to sell a house whereas stocks can be sold in seconds.

Now the bad news.

People who find themselves in these circumstances get hurt the most because they:

• Are forced sell at a bad time due to a job loss or transfer.
• Have little equity in their homes and huge mortgages.
• Are counting on large gains in home equity to fund their retirement.

I would add that an underlying characteristic is that such people have most likely stretched themselves beyond reasonable borrowing limits just to get into their homes.  Under normal circumstances they could not afford their homes but the mortgage industry has enabled them with exotic mortgage products and lower credit standards.  This is a dangerous mix.

No on knows if, when, or how the recent U.S. housing boom will end.  Housing prices may just flatten out rather than suffer serious declines.  In that case it may not be such a big deal.  But there doesn't need to be a dramatic end to the housing boom for the above variables to work against a family.  On an individual level many things can go wrong when a person is swimming in debt.  

The key is not to put your family in that situation in the first place.

Oct. 22, 2005 - Interesting

Oct. 25, 2005 - Thanks Lori Ann

Nov. 15, 2006 - owning a home.

Nov. 15, 2006 - Reply to Spidey