Is a sharp correction in store for real estate market?
Fannie Mae, largest buyer of mortgages in US, is worried. They recently warned that probability of a housing bust has risen sharply in certain parts of country.
Fannie Mae and Freddie Mac financed about 43% of new home mortgages last year. That's down from 53% year before.
Fannie and Freddie only buy "conforming loans" In these days of easy money and competition for borrowers... more lenders are selling mortgages to non-government sponsored loan buying companies. They have less stringent lending standards. That means more risk as it allows home buyers with poor credit records or unconfirmed income to qualify for mortgage loans.
Listen to this! 24% of sub-prime loans sold to non-conforming buyers in 2004 were adjustable rate mortgages with an interest only feature. And... these mortgages are not restricted to less expensive houses. The share of jumbo mortgages loans ($359,650 & up) accepted without full documentation increased from 27% in 2001 to 51% in 2004.
Fannie Mae warns that real estate collapse of late 1980s was preceded by similar patterns.
Some point out that real estate bubble is effecting value in just certain areas. But they don't understand that just 22 of most expensive metropolitan markets in U.S. account for 35% of total value of country's residential real estate.
If those markets begin to collapse they will shock real estate values everywhere.
What should you do if you are sitting on fat real estate capital gains. First... make plans now. Once a correction (crash) begins you will have a hard time getting out of your property. Values plunge and buyers disappear.
If you don't believe there will be more than a little dip in real estate appreciation and you want to hold on to your property... here's an idea. Use stock market as insurance. How do you do that?