Ask Merril Lynch About the Housing Bubble

“What's ahead for the housing sector? We think that there could be a slowdown in the pace of housing activity even if long-term interest rates do not move higher. One reason is that interest rates alone do not determine the affordability of housing — home prices and personal income are part of the mix. Increases in home prices lately have been outpacing increases in income, pushing affordability down to a 15-year low. Another reason why housing activity could slow even if long-term rates stay put is that adjustable-rate contracts now account for about 30% of all new mortgages; that suggests that borrowers will be pinched by increases in short-to-medium-term interest rates. In that context, it might be a good idea to remember that trends in the housing sector typically lead trends in the economy as a whole by about three quarters.”

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