There's a great article in the NY Times today discussing whether or not there is a real estate bubble. The case study was a guy who bought a $360,000 house using two variable rate loans with nothing down. A couple of observations follow:
1. Banks have gotten incredibly lax in their underwriting standards so says Bill Dallas a pioneer in no-money-down loans and a board member of the Cal. Mortgage Bankers Association.
2. What is to prevent the guy in the case study and all of the others who have no equity in their house from walking away if they can't make the payments?
3. It seems the people entering into these loans think that wages will rise as interest rates do - - this doesn't seem to jive with what is actually going in the world today. Wages seem to be going down or staying flat as productivity continues to rise.
I'm not suggesting that if the housing bubble bursts it will be nationwide. It could be a local issue albeit one that is widespread to many localities. I don't think homes on the outskirts of Charlotte for instance (where I now live) will see price compression in the same way that NY will (where I used to live).
The scene is set: A plethora of adjustable mortgages, modest incomes, and an outlook of increasing rates.
This is not a good combination. The best thing I can say is I would bet there will be plenty of great deals in housing the next few years.