What goes up surely comes down. This was proven in the natural world by Isaac Newton. It is soon to be proven again in in the free market world. One of the first recorded instances of a market crash was in 1637 in Holland when tulips were the craze. http://www.holland.nl/uk/holland/sights/tulips-history.html
Although tulips were not as vital to everyday life as housing, the same parallels can be drawn between the tulip craze as well as other instances of commodity and financial boom and bust cycles and the current cycle in the Massachusetts and national housing markets.
Fueled by a combination of very cheap money and creative or dangerous financing schemes, the market had gone wild since the post 9/11 rate reductions by the Fed. At the bottom of the rate cuts by the Fed, long term fixed mortgage settled in near 4.8%. Other variable rates linked to such thing as LIBOR (London Inter-Bank Offered Rate)got as low as 1.21% in June of 2003.
The net result of this development was that the lowered cost of money enabled many stretch buyers who were shut out of home ownership now were in the market as buyers. Inevitably this demand increased the pricing dramatically. In addition to the cost of money was the new attitude by mortgage companies and banks that allowed for a buyer to get a first mortgage and then take out a second mortgage at a variable rate to finance the down payment.
It is the owner of variable rate mortgage instruments that now finds themselves in difficult straights. A $250,000 from three years ago could be up as much as $500 a month on the monthly payment. Couple that with a doubling of the heating and utilities costs as well as an average increase in the property taxes of as much as 35% in some communities and you can see how some families are struggling to meet the monthly expense of home ownership.
Now comes the cruel reality of asset speculation. If some people now find themselves unable to meet the monthly financial obligations they may seek to sell the property and escape the crushing debt burden. This of course is now not an available option because the number of homes coming to market has sharply reduced the prices and the homeowner may find themselves underwater in the new value of the home versus the price they bought it at.
The result of this is that Massachusetts is experiencing a significant rise in the number of foreclosure in the residential housing market.
http://www.boston.com/business/ticker/2006/08/mass_a_leader_i.html
This report indicates that Massachusetts has had a 181% increase in foreclosure filings but even more ominously, that we are second only to California with cities in the top 20 for percentage of price-reduced homes.
An interesting aside to this problem is the impact it is having in the affordable housing market. As a result of Chapter 40B legislation there has been an enormous number of new projects under construction in the greater Boston region. Some are rental and some are condos. A case in point is the Grandview Farm project in Burlington.
The town offered the developers a sweetheart deal by granting them a ridiculously low price for the parcel in the center of town on which to build 42 condos with prices ranging from 150k for a one bedroom to 240k for a two bedroom. The buyers of the units were determined by lottery, age and by net worth restrictions.
As we approach the completion of the deal it is now possible that a worst case scenario develops. With the many of the 42 lottery winners putting their current homes on the market and the normal inventory taking longer to turn over we now have a glut of homes on the market. This of course will translate into even lower prices. Will this result in a number of the lottery winners taking their houses off the market and subsequently backing out of the deal? The impact of such a scenario is that the units that were once priced as affordable may now be left unsold.
This situation has potential legal ramifications because the terms of the deal provided for the prospective buyers to put down a non refundable 40 thousand dollar down payment. Apparently the money can be refunded if another buyer is found for the unit but what if that doesn't happen for a lengthy period of time or if it is at a lower price? Who takes the hit, the developer, the original lottery winner or the town?
In any event it will be some time before these and many other questions are answered. The Fed has come to its senses and paused for the time being in raising rates, however it may be to late. What now is is steady flow of foreclosures and price reduction may soon become a torrent. This will be aggravated further if we have increases in unemployment as a result of a Fed induced recession.
