real estate quickies

From Reuters:

The share of outstanding mortgages that are ARMs has grown to 1 in 3 from 1 in 10 in 2001, research by Bear Stearns said.

"Lenders have introduced a much broader line of loan products over the past few years to compete for a shrinking pool of business," Douglas Duncan, chief economist at the Mortgage Bankers Association, said.

Loan refinancing has dropped significantly. The MBA's closely watched refinancing index has plunged to 2,554.3 from a record peak of 9,977 in May 2003.

Bear Stearns says analysis of "serial" refinancers shows the evolution of loan products. Borrowers typically start with 30-year amortizing loans then move into amortizing ARM hybrids, which are loans that carry an initial fixed rate for a set time period of time but that move to a floating rate at maturity.

After the hybrid ARM loan, consumers tend to refinance into interest-only products, followed by an option ARM product.

With an option ARM a borrower can choose payment options, including paying no principal and less than the interest due each month. A "negative amortization" loan can end up growing in size during its term.

"No other product can compete with the low monthly payment of an option ARM," Bear Stearns said.

Even interest-only loan products fall short of option ARMs, the firm said. For example, with the assumption of a standard 1.5 percent teaser rate offered on most option ARMs the break-even interest-only rate would be 4.14 percent, well below any hybrid or fixed mortgage rate currently offered.

Bear Stearns' conclusion: it is the end of the road in the mortgage affordability cycle.

From the Wall St Journal:

In May 2002, as talk of an international housing bubble was just beginning, Australia's central bank was already acting. Warning of "overheating in the housing market" in Australia, it raised interest rates.

It kept on raising rates the next year, and officials talked loudly about the threat of housing prices getting too high. The most populous Australian state even imposed a special tax on investment properties to discourage real-estate speculation. By 2004, the market peaked after more than two years of 15% or greater annual growth. The most recent data suggest Australia's home prices have changed little over the past year, and have fallen slightly in the two biggest cities, Sydney and Melbourne.

It's too early to declare Australia's experiment in bubble-popping a success. Japan's central bank raised interest rates in 1989 and 1990 to pop a real-estate and stock bubble. For a while the economy seemed destined for a soft landing. Then it plunged into a decade-long malaise, from which Japan is only now emerging. In Australia, consumer debt is running at its highest-ever level, leaving many families vulnerable if the economy slows further.

The Reserve Bank of Australia, the nation's central bank, started raising rates in May 2002, when the U.S. was barely out of a recession. Its key overnight lending rate is now 5.5%, among the highest in the developed world, compared with 3.25% in the U.S. In studies and speeches, the Reserve Bank made no secret of its desire for housing fever to cool. Gov. Ian Macfarlane said in a speech in early 2003 that a "scaling back" of household borrowing and property development would be in the "longer term interest of the Australian economy."

Meanwhile, the state of New South Wales, which includes Sydney, instituted a 2.25% tax on the sale of investment properties. The move discouraged some speculators who bought and "flipped" properties for quick profits.

By early 2004, the fever broke. The percentage of homes that were successfully sold via auction tumbled from a high of nearly 80% in Sydney in 2002 to just over 30% by mid-2004. In Melbourne, a glut of downtown apartment units emerged. Ratings for "The Block" fell.

On the whole, the Australian economy has weathered the slowdown well. During the height of the boom, consumer spending was growing by more than 6% a year, as families used income from home-price appreciation and home-equity loans to finance new spending. More recently, consumer-spending growth has slowed to about 3.5% a year. Gross domestic product is expected to grow by 2% or more this year, in part due to a global commodity boom that has increased demand for Australian natural resources.

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