by Calculated Risk on 12/18/2005 03:40:00 PM

From Knight Ridder: Boom likely over in housing market. The article contains comments from FDIC Chief Economist Richard Brown and Federal Reserve Bank of Chicago Senior Economist Richard Rosen.

...homeowners will no longer be able to use houses as piggybanks, cashing in on gains in appreciation periodically through low-cost refinancings. And many will be forced to hold on to a house or condominium for a long time as they wait for prices to rise.

The problem is that rising mortgage rates are putting an end to the easy money that underpinned increasing home prices, said Richard Brown, chief economist of the Federal Deposit Insurance Corp. in Washington.

"Price increases have far outstripped income growth for a long time, particularly in the last two years, but that period is coming to an end," he said.

The so-called golden age for mortgage lending is about over after lasting about 20 years, he said.

"The end of the boom probably is not far away," Brown said. "It likely will lead to a long period of price stagnation, but not technically a bust."

And from Federal Reserve Bank of Chicago Senior Economist Richard Rosen:

Home prices "have been rising far more rapidly than rents for the last four years. This probably is what Federal Reserve Chairman Alan Greenspan meant when he pointed to froth in the housing market," said economist Richard Rosen of the Federal Reserve Bank of Chicago.

He said a huge drop in long-term mortgage rates since 1985, when they were around 12 percent, to a recent rate near 5 percent "meant that you could afford more house for the same monthly payment."

Rosen compared the United States with Britain, where mortgage rates have been rising for about two years. Here, the uptick in rates began later.

"In Britain, if housing was a bubble, it didn’t burst," he said. "When mortgage rates rise, prices flatten, but they may not actually decrease."

One warning sign for the housing market, Rosen said, is that more and more owners are putting property on the market, and real estate is taking longer to sell.

"The risk is that if sales slow, there will be too much supply, creating price risk," he said.

Note: this article was orginally published on Dec 9th.