House party's over

A "For Sale" sign hangs in front of a home in Naples, Fla., a city that a March 2006 survey declared the most overvalued housing market in the US.

KAI RYSSDAL: If you want to analyze the housing market, you can look at interest rates. Or home sales. Or prices. Or you can go a bit farther back in the production chain for a different take. The National Association of Home Builders said today their index of homebuilder sentiment hit its lowest level in more than 10 years. Sounds bad, but analysts are calling it an "orderly cooling down." Commentator and economist Michael Hudson offers his own indicators.


MICHAEL HUDSON: The property bubble is bursting, although it's occurring in slowmotion. You can tell by listening to the canary in this once productive goldmine.

That canary is the real estate speculator. In a bubble, the speculator is the first to see the warning signs and act on them.

Right now, real estate speculators are unloading. Those who bought early are taking their profits before these are eaten away.

And once speculators begin to pull out, there won't be much demand left.

Just look. New housing starts are declining. The National Association of Realtors reports that houses for sale are lingering longer on the market. Mortgage default rates are up, forcing over-indebted owners to sell out.

Reasons abound for a downturn. Mortgage interest rates have jumped to their highest level in four years. The owner's income, or rent, now covers only about 80 percent of the mortgage loan that buyers could get last year. So less credit is available to finance the purchase of homes.

To top matters off, fuel costs are soaring. And local property tax bills are catching up with recent price increases.

Just to break even, speculators say they need prices to rise by more than 14 percent over the course of the year they hold a property. Otherwise, they can't cover the broker's fee, the mortgage interest and closing charges.

That's why they're pulling out or cutting their losses before prices drop still more.

Ordinary homeowners find themselves frozen in, with heavy mortgages and rising expenses, and fewer buyers.

Most people's mortgage payments now total more than 40 percent of their income and they have other debt besides.

So, they've got no discretionary spending money, and they're scrimping on goods and services.

So, what's the moral?

Mortgage bankers and real estate brokers were wrong. Running up all this debt in a real estate bubble may not have been the best way to get rich after all.

RYSSDAL: Michael Hudson is the president of the Institute for the Study of Long Term Economic Trends.

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