Tuesday, 13 September, 2005

Housing Bubble Revisited

Last week's Round Rock Leader had a front page article, Boom coming with bust in Hutto as foreclosures spike, which points out that the foreclosure rate in Hutto (a small town about 10 miles east of Round Rock) reached 4.8 percent from January to September.  The foreclosure rates in Round Rock and Austin are 2.9 percent and 1.3 percent, respectively.  Why such a big difference?

Not surprisingly, the primary cause of the foreclosures is first-time home buyers purchasing homes with incentives and deals they are unfamiliar with and can't afford.  The two most popular incentives are zero down, and interest rate buy downs.  Especially with the buy down programs, purchasers aren't prepared for the rise in interest rates after the first few years.  I mentioned this in my Housing Bubble post on May 28.

Something else that trips up the unwary is property taxes.  For some odd reason, property tax estimates on some disclosures are based on appraisals of unimproved lots.  Land in Hutto is still very inexpensive, and the taxes are trivial.  But add a $120,000 house to the lot and the new homeowner suddenly is faced with a $3,000 annual tax bill.  That extra $250 per month comes as a rude shock to a young couple who is just barely squeaking by after nine months in the new house.

Ultimately, the responsibility for these foreclosures falls on the individual home buyers, but I find it irresponsible and almost criminal that home builders and mortgage brokers will approve buyers who they know will be unable to meet the commitments.  But builders want to sell houses and mortgage brokers need their commissions, so they encourage the unwary first-time buyer to stretch as far as possible.  All too often, the buyer ends up bankrupt and the mortgage company or loan guarantor (usually some government program or another) ends up foreclosing on and repossessing the property.

According to "the experts," the home building boom that continued through the recession of a few years ago and continues still today is supposed to be good for the economy.  I would believe that if all this new construction was being financed at least in part by cash--people putting real money into a down payment.  But that's not happening.  New homes are being financed entirely by debt, which is just putting off the problem.  One of these days somebody will have to pay.  It won't be pretty.