A few weeks ago, in testimony not widely covered by the press, Allan Greenspan sang the praises of adjustable-rate mortgages. Given that fixed-rate mortgages are at near-record lows, and that interest rates are expected to raise sooner or later, many analysts have questioned these remarks.
Benjamin Wallace-Wells views Greenspan’s speech as a sign of an approaching decline in the housing market. The current recovery has largely been fueled by a wave of mortgage refinancings, which have pumped money into consumer’s hands. This cycle may be near an end, and Greenspan’s comments are calculated to squeeze one last round of cash out of homes.
Moreover, Wallace-Wells contents that housing prices in some markets are not sustainable:
Truth is, in most of the country there’s no housing bubble. Perhaps the crucial ratio from which economists determine whether housing markets are out of whack is the ratio of home prices to annual income. In most of the country, it is modest, 2.4:1 in Wisconsin, 2.2:1 in Kentucky, 2.9:1 in Illinois.
Only in about 20 metro areas, mostly located in eight states, does the relationship of home price to income defy logic. The bad news is that those areas contain roughly half the housing wealth of the country. In California, the price of a home stands at 8.3 times the annual family income of its occupants; in Massachusetts, the ratio is 5.9:1; in Hawaii, a stunning, 10.1:1. To some extent, there are sound and basic economic reasons for this anomaly: supply and demand. Salaries in these areas have been going up faster than in the nation as a whole. The other is supply: These metro areas are “built out,” with zoning ordinances that limit the ability of developers to add new homes. But at some point, incomes simply can’t sustain the prices. That point has now been reached. In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home. In the late 80s, the last time these eight states saw price-to-income ratios this high, the real estate market collapsed.
This argument about inflated housing prices seems strong. But people have been talking about a housing bubble for a year or more, and it has yet to become evident. So we’ll continue to wait and see.