The Anticipated Housing Plateau Is Here

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The Anticipated Housing Plateau Is Here
As we’ve been warning for some time now, it was inevitable that the overheated real estate market would cool off. That time has come, but the situation isn’t as dire as it seems.

First, the bad news: Existing-home sales have fallen by 5.7 percent in the past 12 months. The median sales price rose by just 4.2 percent over the previous year, which is the smallest gain in five years.1 Meanwhile, in May, the Federal Reserve hiked interest rates for the 16th time in a row, which has pushed the rate on 30-year fixed mortgages to the highest level in four years.

The people who are the most vulnerable in any price downturn are those who borrowed more than they could afford to pay for a home. According to the Wall Street Journal,2 delinquency rates on home mortgages are rising, and the numbers should continue to swell until 2008. That’s because mortgage delinquencies usually hit their peak three years after loans are written, and 2005 was a banner year for risky mortgages.

According to the Journal, a study by First American Real Estate Solutions found that 29 percent of homebuyers who received mortgages in 2005 have no equity in their homes or owe more than their house is worth. In 2004, less than 11 percent of borrowers fell into that category. These home owners will be hurt the most if prices fall, because they’ll be making payments on houses that are worth less than the amount they borrowed.

Now, the good news: A driving force behind the housing boom was the purchase of second homes by the Baby Boomers. For the 75 million members of this generation, one of anything is never enough. For example, U.S. Census figures reveal that the average American household now has 2.4 televisions and 1.7 cars. Now, increasingly, one house isn’t enough.

A survey by Harris Interactive for the National Association of Realtors found that 25 percent of Baby Boomers own more than one property. That amounts to nearly 20 million Americans who have bought second homes or investment properties.

Overall, 40 percent of all homes sold today are second homes, compared to just 6 to 10 percent in the past. But that’s not all: Surveys of buyers of second homes reveal that 60 percent of them own two or more vacation homes, in addition to their primary residence. Obviously, many of those third and fourth homes were bought as investments when prices were climbing.

Now, housing prices have peaked, and in many overbuilt markets, sellers are discovering they have to cut their asking prices.

As Barron’s3 reported in a recent cover story, “After a long string of double-digit annual price increases, a number of second-home meccas across the country are suddenly suffering from plunging sales volume and burgeoning inventories of unsold homes...

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