Let Me Try to Explain High Cost Housing

I live in a sociable neighborhood where the parents (of which I'm one) get together for the occasional barbecue or New Year's Eve party. After we're done discussing our kids' academic or sporting achievements or ringing our hands about too much time spent in front of the Game Boy, the talk ultimately falls to real estate.

Stop me if you've heard this one: topic "A" is always the exploding price of homes - not just in our Beltway neighborhood but vacation properties, be it a home at the shore, the lake or up in the mountains. Here's a refrain I've often heard (as well as said): "If only we had bought four years ago."

Yes, not only are home prices on fire - so are values in resort areas, a topic I've written about before in this column. And even though I have looked at buying a shore property (for personal use as well as an investment), I'm still too chicken to go down that road of playing landlord and real estate investor. Yet, that voice keeps going off in my head (or is that my wife talking?) - if only I had bought four years ago.

What happened four years ago? The stock market bubble - particularly tech stocks - burst and investors began searching for new places for their money, finding it's better to own something real (as in real estate) as opposed to something "e-centric."

Homes selling for $175,000 at the Jersey Shore four, five years ago now fetch $500,000. Don't believe me? Look it up.

Of course, even though I don't want to handle the financial stress of being a second-home homeowner, it appears that thousands upon thousands of Americans have been snapping up second homes like wild fire. Who says so? The National Association of Realtors, that's who.

According to a new study, NAR says the sale of second homes (vacation and investment properties) accounted for 36% of all homes sold last year. That's right - 36%. That's more than one-in-three. Is that a phenomenal number or what? Yes it is.

But just who exactly is buying these second (and third and fourth) abodes? According to NAR, the typical investment property buyer is 47 with a household income of $85,700. (Baby boomers represent a post-war demographic of 80 million Americans born between 1945 and 1964.)

However, NAR doesn't tell us exactly where they're getting the money from to buy these homes. But we can all speculate and here goes: some consumers are tapping available equity on their primary residence, using the cash to play in the second-home arena.

The older the buyer, chances are the more equity he or she has to play with. The more equity they have, the more homes they can buy. Sounds logical. And if you throw in cheap financing via low interest rates (low until recently, at least) and interest-only loans (which carry lower monthly payments) you can pretty much figure out how this game is being played.

There is one other factor as well: foreign money. The dollar has plummeted and the euro has risen like a phoenix which means overseas-based investors can come to America, cash in their euros for dollars (winding up with more dollars) and purchase homes here.

How much of a force foreigners are is hard to say but according to a recent story in The Wall Street Journal, Europeans are snapping up homes and condos across Florida, New York, Chicago and even Colorado.

Lenders are beginning to raise their rates. Has the long-awaited slowdown/correction in the home purchase market finally begun? Are real estate speculators who are highly leveraged - who have four and five homes and just as many mortgages - about to be humbled? Should residential servicers start beefing up their foreclosure departments? Could be. And me? I understand you can buy some nice cheap building lots near the beach in Vietnam for $30,000 - in U.S dollars, of course.

Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News.

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