Pictures of a mania? - US Housing

The latest issue of John Mauldin's "Outside the Box" is a recent letter by James Montier of Dresdner Kleinwort Wasserstein concerning the US housing market. He is of the opinion that the housing market is in a nation-wide bubble and presents the following evidence.

Real prices (that is, prices adjusted for inflation) have already exceeded the top reached at the previous real estate bubbles in the late seventies and mid-eighties. That is, houses are historically expensive.



The price to rent ratio, that is the price of a house divided by the monthly payment to rent the same house, is going to the moon and vastly exceed the levels of the previous bubbles. This means that houses are no longer attractive as an investment. People that buy properties as investments now do so only on the expectation of capital gain, not rental income. That is, prices must keep going up.



The mortgage/income ratio, that is how much income is being spent to pay a house mortgage, has reached the same level of the peak of the late eighties, but with much lower interest rates. That is, houses are so expensive that even historically low interest rates make them hard to afford as they were at that time.



The mortgage/income ratio after tax payments are included is close to the late eighties level but still far below the seventies level, when the tax code was different.



To keep feeding the bubble, lenders are resorting to a higher number of interest-only loans and to loans with smaller downpayments, because the monthly payment is smaller than in a standard fixed-rate loan for the same amount.



Moreover, they are scraping the bottom of the barrel, lending to increasing number of high-risk borrowers (sub-prime lending).



It is just a matter of time.

Categories: real estate