Tuesday, May 17, 2005


What is the Sound of One Bubble Bursting?

Sounds like the housing market is getting ready for the domino effect:
U.S. Warns Lenders To Elevate Standards
Agencies Cite Risks In Home Equity Loans

By Kirstin Downey
Washington Post Staff Writer
Tuesday, May 17, 2005; Page A01

Federal banking regulators yesterday warned banks and other lenders to be more selective about who can get home equity loans and lines of credit because rising interest rates may make it harder for people to repay their loans.
(Emphasis added.)
As interest rates rise, the income required to qualify for a home loan goes up and folks on adjustable rate mortgages (ARM) have to pay more. Some of those folks will find themselves overextended, and try to sell. Buyers won't be able to qualify, so the bank will foreclose and sell for a loss. This pushes housing prices down further, meaning more houses will have mortgages exceeding their resale value. More overextended homeowners will try to sell, forcing prices still lower.

Meanwhile, the price of gas will probably go back up as the summer driving season gets underway - lowering home prices in outlying areas. It's going to be an interesting summer.


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