Market Analysis

Flipping Housing Bubble

You are in mortal peril.

You are in mortal peril. Very shortly, the housing bubble will impoverish us all, bankrupt ARM-holding dupes, and possibly show up at your home to kick your dog.

We know we're in a housing bubble because we hear it everywhere—CNN, The New York Times, BusinessWeek, MSNBC, Katie Couric, Oprah, Us Weekly, and Mademoiselle, to name a few, all assure us of impending doom.

Except, we know if "they" agree it's a bubble, it's not. (See "Bamboozled by Bogus Bubbles" under Media Hype for more analysis on why it's not a bubble.) Bubbles are not called bubbles until after they've burst. Always. While they are in the state of bubblehood, "they" say it's a new paradigm, a new economy, it's different this time, and other variations on that theme. So, no, this widely and uniformly predicted bubble's not a bubble.

Some may not be satisfied with that analysis. For fun, let's pretend we're indeed in a housing bubble.

So what?

If your very livelihood depends on flipping residential real estate for profit, a housing bubble (should one exist) probably smarts pretty bad. But if you're not a rampant flipper, and the price of your home has dropped a lot—here's an idea, just a thought, really—don't sell your home. You can live in it. It has a roof and everything.

Perhaps some must sell their homes for job relocation, but that's hardly epidemic. A housing bubble wouldn't impact anyone with the intention or capability of staying put for a few years, i.e., the vast majority of homeowners.

Do dropping real estate prices impact your net worth? Sure! And is that bad, particularly for a retired person? No! Retired people typically don't systematically dismantle their homes to barter the scrap metal for the chicken piccata special at Denny's. Quite rationally, they prefer living off their liquid net worth, or perhaps a pension. Your liquid net worth is not impacted, not ever, by the price of your home.

But wait, aren't some people using their homes as ATMs? They've got those insidious, floating interest rate loans, and racked up debt against their now depreciating asset? Worse than those Mensa candidates, what about those who financed their entire home with an adjustable rate mortgage (ARM)? With rates rising, won't they find their payments unmanageable? What incorrigible morons!

Before the stoning begins, let's examine the facts. First and foremost, banks don't write loans likely to default. When banks lend on an adjustable rate basis, they don't cross their fingers and hope the rates never move. They base the underwriting on a much higher assumed payment. If the mortgage applicant cannot handle a much higher payment, they don't get the loan. Easy as that.

That doesn't mean folks won't complain if their payment goes up. Of course they will! But complaints about higher payments are not the smoking gun of calculated oppression by Big Bad Bank. It just means the borrowers were delusional in expecting the rate to never move. Delusional people shouldn't be taken seriously. Or looked in the eye. Or given sugary candy.

As of June, 2006, homeowners spent 11.6%* of their disposable income on mortgage payments. Probably not as high as you thought, particularly since banks will generally allow a much higher debt-service-ratio. Historically, that's actually on the high end, but per capita net worth has also been reaching record heights. Are the two related? Perhaps, but that's for another column.

All right, so everyone isn't drowning in mortgage debt, but some small percentage must be. Let's pause to weep for them.

But hang on. If someone has enough sense in their skull to apply and qualify for a mortgage, they can probably tell when their payments are going up. Put it another way: Wouldn't you notice if you received a higher mortgage bill? And, if it became too high, wouldn't you do something about it?

Currently, fixed rate mortgages are at historic lows. Funny that! Folks who financed their homes back in 2004 at a low floating rate can now easily convert their mortgages to low fixed rates. Their payments will never move again!

Crisis averted.

Consider it this way: Do you buy the newspaper with the "You're Doomed! Read Me to Find Out How!" headline, or the "Everything's Pretty Much OK" one? Starving plebes bankrupted by ill-intentioned, nefarious product-pushing big banks sell more advertising than record numbers of young people, single parents, and minorities becoming homeowners.

It's not a bubble anyway, so quit worrying.

* The Federal Reserve Board, "Household Debt Service and Financial Obligations Ratios ,"

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.