Three news stories this week made us pause: rising interest rates, Federal Reserve Chairman Alan Greenspan’s warnings about the glow coming off the hot housing market and the downturn in Los Angeles, the largest real estate market in the U.S.
But another story worries us even more: “Las Vegas real estate boom may boost foreclosures.” Problems in Sin City are not new, but as we peeled back the onion on the housing market there after this story ran, we became very concerned, particularly if this sort of behavior is happening elsewhere.
Here is the recipe for disaster in Las Vegas and we fear in other hot markets around the country: rising interest rates, the willingness of lenders to accept payment to income ratios of more than 40 percent, and price appreciation at an unsustainable 31 percent year-over-year.
And there is more. We learned that Las Vegas is ripe with property flipping, which occurs when a buyer buys today and sells tomorrow at a higher price. In short, that is sheer speculation. We also heard that buyers are being asked to forego appraisals and lenders are going along with it, because appraisers cannot support the rise in prices so that lenders can underwrite the loans.
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The danger is a combination of rising interest rates, the willingness of lenders to accept payment to income ratios of more than 40 percent, and crazy rates of price appreciation. The result is it could put young and inexperienced borrowers at risk.
UGH. This sort of speculation and careless loan underwriting has in the past led to a harmful downturn in the housing market.
When greed takes over, demand becomes irrational and prices follow the nonsense up and eventually crash down.
The industry must get a grip and police itself or the market will do the clean up and it will get ugly.
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