Home Society Is the next mortgage crisis on our doorsteps?

Is the next mortgage crisis on our doorsteps?

According to Ben Carlson, investors don’t have to worry about a home crash in the US. Prices may rise extremely quickly, but higher wages and lower mortgage charges are counterbalancing the trend.

The tight housing market, coupled with low interest rates and high government spending are setting records everywhere. In Europe, Sweden, Denmark, Poland, Germany and the Netherlands are among the leaders. But the US is also well above 10%. To illustrate this, in April, prices in the 20 largest cities are about 15% higher than a year earlier, according to the S&P CoreLogic Case-Shiller 20-city home price index.

Should we be worried about that? Maybe even a new credit crunch is threatening?

Some experts warn against this. The Japanese bank Nomura warned a few weeks ago that the US, Taiwan, the Netherlands, Sweden, Germany and Japan are in danger of going into a financial crisis within twelve months.

Robert Kaplan, the president of the Central bank of Dallas, recently warned of the historically high valuation of houses.

His colleague James Bullard from the Fed of St. Louis. Louis argued that it might be time for the Fed to stop buying mortgage backed securities. Asset manager Ben Carlson of Ritholz Wealth Management is less concerned. In his column a Wealth of Common Sense, he points out that in the US house prices did not rise so much over a longer period of time.

Since 2007 – the previous peak – the figure has been 35%. On an annual basis, this is a meager 2.1%. Since 2000, prices have risen by 150%, equivalent to 4.3% per year. But also since the low of the housing market in 2012, the annual increase was 6.6% per year.

That does not change the fact that the markets have been going crazy for the last two years. The big question is whether Fear of Missing Out does not tempt home buyers to take too high risks by taking out high mortgages with relatively low incomes.

This too appears to be not so bad. Carlson points to an article in the New York Times which describes that it is mainly Americans with high credit ratings who take out new mortgages.

Those are buyers who can take a beating. In 2007 it was very different. Then it was the socially weak who borrowed a lot.

From a chart of the Federal Reserve of St. Louis. Louis shows that the mortgage rate relative to income is at an extremely low level. In 2007 it was over 7%, now only 3.5%. And the trend is down rather than up thanks to overdrafts to New, much cheaper mortgages.

For comparison, between 2000 and 2007, the average rate on a fixed rate 30-year mortgage loan in the US was 6.5%. Between 2012 and now it has fallen to 3.5%. That creates a lot of space in the wallet.

Carlson is therefore not concerned about a crash in house prices. That does not mean that he thinks the pace of price increases is healthy. That’s not true.

Just think of the growing inequality of opportunity between generations and families with high and low incomes. Moreover, the rapid rise in prices indicates a shortage of supply.

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