Wednesday, October 19, 2005

Maybe Not the Best Idea

Speaking of development and disasters (but more of a financial nature), for some reason new home construction is still surging. A slowdown was expected, but we've seen no signs of it so far. And, when the Fed Chair is talking about hiking interest rates to combat inflation, you've got all the ingredients of a housing market bubble.

The Commerce Department reported Wednesday that construction of new homes and apartments rose by 3.4 percent last month to a seasonally adjusted annual rate of 2.11 million units, the fastest pace since last February.

Analysts had been forecasting that housing construction would decline by 1.7 percent in September, believing that increases in mortgage rates would finally start to cool the red-hot housing market.

Freddie Mac reported that 30-year fixed-rate mortgages hit 6.03 percent last week, the first time they have been above 6 percent since last March. Economists predict that those rates will continue to rise as the Federal Reserve keeps pushing interest rates higher to combat inflation pressures spawned by this year’s surge in energy prices.

Where are people getting the financing for this? Interest-only loans. Loans that are going to bankrupt people when the Fed starts its inflation-fighting crusade. It's a good think we've got bankruptcy reform! But this is only a symptom of a greater problem, that Americans are starting to really overextend themselves on debt. As most of the building is occurring in the South, and the focus is on apartments and single family homes, I'm guessing these people aren't buying their houses with cash but with debt. And as more funds go to interest on debt, we're going to see a lot of money suddenly get sucked out of the economy when the bill collectors come.