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Retail Industry

Interest-only house

Building Products, July-August, 2005 by Jean Dimeo

I recently heard a funny speech made by a leading real estate economist. (Believe it or not, a numbers guy can have a sense of humor!) John Turccillo, a former chief economist for the National Association of Realtors, said there are three major factors impacting the U.S. housing market--factors he compared with the three witches in Shakespeare's play Macbeth. Turccillo called the housing witches Demographica, Greenspan, and Clin-Bush. These three, he said, helped create record homeownership, but at the same time set up a deceiving situation that, as in Macbeth, appears to be good but could be very bad.

Witch No. 1, Demographica, represents consumers hungry to buy homes, in particular Generation Yers and the country's swelling population of immigrants.

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Witch No. 2, Greenspan, represents, well, you know who that is. He's the Federal Reserve chairman who helped drive interest rates down to record low levels.

Last but not least is Witch No. 3, Clin-Bush--you guessed it, Bill Clinton and George W. Bush melded into one persona. Clin-Bush helped relax credit standards so many more Americans could qualify to buy houses, townhouses, and condos. Clin-Bush "let slip the dogs of war," Turccillo said quoting from another famous Shakespeare play, Julius Caesar, remarking that the dogs of war are Fannie Mae and Freddie Mac. Then along came the stock market debacle of 2000, which made houses look like fabulous investments. Low mortgage rates, coupled with relaxed lending standards and stock market concerns, created a huge demand for housing--and thus record sales of new and existing properties. "Everyone is moving up into the best house they are going to ever own/the economist stated.

What's scary about this scenario, Turccillo said, is that two-thirds of all new loans are adjustable-rate mortgages (ARMs) or interest-only loans. Homeowners "aren't owning, they are renting with an option to buy," he commented. Greenspan, who helped create the situation, told Congress recently that he was very concerned about the rise of these types of loans.

The Bush administration says owning a home is the best way for families to build wealth, which might just be true. I should know; my house in Maryland has nearly tripled in value during the past five years. And HUD secretary Alphonzo Jackson said recently that the administration is committed to offering more ARMs and low-down-payment loans as a way to qualify lower-income consumers.

Turccillo noted that when mortgage rates are low, buyers typically are drawn to fixed-rate loans. But that's not true now. "We're bound to see a fallout from the overly liberal lending market," the economist contended, noting that when mortgage interest rates rise--and they will--ARM rates will rise and people might not be able to sell their homes so quickly.

I'll stick with my fixed-rate mortgage. I only have eight years left to pay on my house, and that's a nice feeling indeed.

Retail Industry

Interest-only house

Building Products, July-August, 2005 by Jean Dimeo

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