Will Housing Speculation Burst the Bubble?

Some scarey news that I spotted today: It seems that speculators have been partly responsible for the "wild ride" in the housing market. As such, they could be a hidden factor that could lead to the sector's tumble if they all decide to "cash out" at once.

On the positive side, it looks as if the housing market is currently cooling off "in an orderly fashion" according to David Seiders, the chief economist of the National Association of Home Builders. But we all have to hope that the market continues to cool at a gradual pace.

How bad could it be if speculators are invested heavily in a market area? Very bad. Estimates suggest that as many as four out of every 10 purchases in some places are by investors, some of whom Seiders believes are depending solely on appreciation. In fact, the market has been so hot in some areas, investors are not even renting their properties; they simply buy them, hold them for a short period, and "flip" them.

Seiders paints a bleak scenario if speculators pull out of the market as quickly as they got in. Such a fast exit of the investment dollars could "provoke sizeable house-price declines, cut into housing equity and provoke a snapback in the personal savings rate that would seriously cut consumer spending," says Seider. In other words, it's not just the housing market that would suffer; the overall US economy would suffer.

The biggest risk is in the markets that have the largest percentage of investor property purchases. According to Loan Performance, a San Francisco company which studies the mortgage market, the share of second-home and investor purchases has been between 31% and 39% in eight metro areas -- Las Vegas, San Francisco, West Palm Beach, Fla.,, Phoenix, Tucson, Ariz., Orlando, Fla., Honolulu and Monterey, Calif.


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