Homeowners Miss the Peak, Court Market of Regret

Sept. 13 (Bloomberg) — The other day I went to look at a family house for sale and found a market gone wrong.

The doctor was getting a divorce. The property was 25 minutes from a ski resort featuring some passable black-diamond runs. It came with frontage on a lake with a clean, sandy bottom. Several kids were lying amid the water toys on the carpet. They didn't look up from the big-screen television they were watching as we ambled through. It seemed like the usual real estate picture.

But it wasn't. The house was about to be auctioned by the bank. And even the bank was asking a high price for the market because it wanted to get back the money it had lent to the owners. The house might be beside the water. The doctor was underwater.

Many more Americans may find themselves in the doctor's situation. Earlier in the year and over the summer there was a lot of discussion about a soft landing for residential real estate. Now there also is talk of a harder landing.

A company designed to take advantage of that possibility is doing especially well these days: RealtyTrac, an online marketplace for foreclosure properties. Just last week, Inc. magazine named RealtyTrac to its list of the country's 500 closely held companies with the fastest growing revenue.

Next year might be a good one for RealtyTrac for the usual reasons: rising interest rates, energy prices, the end of the recovery phase of the business cycle.

But there is more at work this time: mortgage debt. Home-price increases may have been strong, but the growth in mortgage debt has been stronger.

Water Toys

Jay Diamond of Annaly Capital Management Inc., an asset-management company and mortgage real-estate investment trust in New York, estimates that $1.2 trillion of the $2.3 trillion Americans borrowed last year was home-mortgage debt. Almost half of that $1.2 trillion, or some $500 billion, was used to buy cars, bigger-screen TVs, water toys. Americans have always talked about credit-card debt as our big national problem, but credit-card debt owed is about a tenth that of mortgage debt outstanding.

"Without home-price appreciation to collateralize borrowing debt, the consumer has lost spending dollars," Diamond says.

Historically, real-estate analysts looked at the construction industry first, such as new housing starts, when they tried to measure what was happening in the economy. Diamond thinks that home-equity loans are where to look, and that the slowdown in equity extraction will exacerbate any decline more than many analysts expect. The lifestyle of borrowing, he said, "is about to become last year's model."

Culture Clash

Even if real estate's landing is a soft one, there will be cultural consequences. One reason Americans tolerate gaps in income between higher and lower earners so well is their sense of possibility. Most of us still believe that anyone can become rich. Buying your own house is part of that, and today home-ownership rates are close to record levels. Because many newer owners hold questionable, exotic mortgages they will be the first ones hurt.

For American professionals — doctors living their own lakeside soap operas, lawyers, teachers, accountants — this story has a special twist. Some people who got the same grades they did in school moved into the financial world, earning salaries that were many times higher. Some time in their 30s or 40s, these other professionals finally comprehended the opportunity cost of what they have passed up.

Market Bet

After all, when they made the choice to go to medical school back in 1981 they thought they were going to miss out on something like the stock market of the 1960s and 1970s, not a market like the 1980s or the 1990s.

At the same time, at least in the case of doctors, has come a downgrading of their professional status. One doctor I knew once handled his frustration at being forced into an HMO by buying stock in that HMO. Another, more cynical doctor sold short stock in his. Many professionals went into denial, and made real estate their stock exchange.

At night they trolled Realtor.com the same way market traders trolled databases during the day. Sure they have retirement plans. But housing became their joy, their consolation, and their source of shopping cash. They prayed they would be clever enough to trade at the peak of a market in which they were the players. This year, they are realizing that they missed their moment.

The next big news may be a true real-estate slump, as hundreds of billions in adjustable-rate mortgages reset. There could be serious trouble as first-time homebuyers find a thumbnail shot of the French doors they just put in on RealtyTrac.

The question of whether a housing implosion, if it comes, will bring an economic recession, is open. There is even good news in this story. Today, home affordability indexes are at lows — many Americans can't afford to buy. A decline will put houses within their reach.

One thing is also clear. For many Americans, real estate is already a market of regret.

(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)

© Copyright 2006 Bloomberg

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