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Housing: Don't Panic Yet


Folks aren't day-trading houses yet, but it's starting to feel that way. Talk at the gym, over drinks, during golf, at work -- nearly everywhere -- increasingly revolves around real estate. The tone isn't far from the hype of the stock frenzy. What did you sell for? Can you still buy? When talk itself gets frothy, it's time to worry about a bubble.

Soaring home prices are the last remaining problem of the tech boom. The extremely low interest rates that were needed to revive the economy after the bust set the stage for a rally in housing that's now reaching extremes. Bringing the real estate market to a soft landing will not only bring closure to a previous economic era but provide the stable foundation for a prosperous new one. A housing bust could undermine consumer spending and economic growth for years to come.

Fortunately, it looks like a bust is unlikely. An unusual balance of economic and financial forces is generating a slowdown, not a breakdown. The Federal Reserve is raising interest rates and appears ready to continue to do so for some time. Long-term mortgage rates are up to 6% and heading toward 7%, a level sure to cool off a large chunk of the housing market in many regions.

At the same time, demand for housing remains high. Immigrants continue to pour into the country and into the housing market. Twenty- and thirty-somethings continue to start families and need more space. Boomers continue to buy second homes and look for retirement properties. In fact, many people aren't even taking out mortgages for their new homes. People are cashing in options that are in the money for the first time in years, inheriting sums from their parents, or just selling their old houses to generate cash.

All this upward pressure in demand offsets to a large degree the downward pull of rising interest rates in the national real estate market. Housing is slowing but not tanking. That's good. Housing has been very good financially to most Americans in recent years. It can continue to be a store of value if a crash can be avoided.


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