For the last few years home prices have been rising about as quickly as gas prices. The market has already priced out a sizeable chunk of Americans, and as prices continue to climb, more potential homeowners are going to get left out in the cold.

Good news! The same builders who have been raising prices and banking record profits are about to get caught by their own greed. New home inventories are reaching record levels, and there are even more in the construction pipeline.

What does all this mean? It means supply is exceeding demand, and that means a buyers market may be on the way.

Interest rate hikes are putting the squeeze on buyers, raising minimum monthly payments on homes they could have afforded when rates were lower. The result is, buyers can’t afford to make the payments on the houses builders have in inventory, and they won’t be able to afford the ones that are in construction now.

The solution? There’s only one viable road the builders can take, and that’s to offer discounts. Tossing in pricy extras for free, the stategy they are taking now, isn’t going to help get a overstreached buyer into a home; they have to lower prices.

Builders are currently playing a high stakes game of chicken with buyers. First they claimed there was no bubble, and now they claim the market is simply cooling. Nice PR, but don’t buy it. The Fed would rather let the housing market take a hit now, than let inflation destroy the economy. The more rates rise, the harder it gets to sell homes. There’s already nine months worth of inventory. Who wants to bet the builders are willing to let that hit 18-24 months?

So inventories are rising, prices are rising, property taxes are rising, and interest rates are rising. Guess what else is also rising? Mortgage defaults. Ouch! Uncle Sam is going to be coming to market with a barge load of homes all over the country, and he could care less about making a profit, he just wants out. What’s that cracking noise? Someone snapping?

By early fall, builders, speculators, private sellers, the banks, and Uncle Sam are going to be fighting over buyers. That’s a game of chicken none of them are going to win. Prices are going to fall; how hard, and how fast remains to be seen.

As a buyer, there are two things you need to look at: will rates rise too high, and eat up any discount a builder may give, or will prices fall faster than rates rise and provide you with a better deal?

A third factor that many people forget to figure in is inflation. If prices on goods and services rise due to increasing gas prices, this leaves less money in the budget. Credit becomes more expensive as rates rise, and savings dip to cover the extra costs that already stretched paychecks can’t meet.

While this may seem like bad news for buyers, it is worse news for builders, investors, and banks. Home sales slump, mortgage applications dry up, and the entire industry looks to the Fed to save it. Flash back to the early 1980’s. Everyone’s looking to sell a home, and no one can afford to buy one.

So which is it going to be? A buyer’s market or a seller’s profit buffet? Let your cell phone be your guide. The more aggressive real estate agents get, the harder it is for them to make a sale. If they are not calling you several times per day, seven days per week, they have enough buyers to go around. When you phone won’t stop ringing, and the agents are camped in front of your doorstep, then you know they are hungry.

This is one time when a wait and see attitude may wind up paying off big. The real estate PR guys may be calling this “cooling,” but buyers are going to call it what it is; good news.

Chris Yarbrough writes for the eBay-Guides.com His home buying guides can be viewed here.

Tags: credit, home, home equity, home loan, Home owner, housing market, Mortgagecredit, home, home equity, home loan, Home owner, housing market, Mortgage

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Just over a month ago I wrote an article on just where I felt the real estate market was heading. I argued that interest rates would continue to rise as the Fed worried about inflation, and builders, who were loudly proclaiming the market is simply cooling off, were just trying to generate additional sales. Another interest rate hike later, the Fed has indicated that further hikes are not off the table, gas prices have continued to rise, and home inventories are reaching epic proportions.

I received dozens of emails from readers who claimed I was misconstruing the numbers, while others suggested I was too stupid to ever own a home, and should consign myself to renting. It is in the spirit of those emails that I offer up these juicy market tidbits. Enjoy!

Ameriquest recently reported a 46% plunge in loan volume, which resulted in 229 retail branch closures, and 3800 jobs eliminated. They are not alone. Saxon Mortgage and ECC Capital Corp. also announced branch closures as rising interest rates continue to drive buyers out of the market and squeeze mortgage brokers nation wide.

On May 6, the Honolulu Star Bulletin reported Honolulu home sales down 41% year-over-year in April, and Maui condo sales off by 50%.

On the mainland, California homeowners and speculators are taking a beating as well. Year-over-year home sales are down a whooping 46% in Sacramento, 30% in San Francisco, and a staggering 50% in Los Angeles/Long Beach.

Checking the Atlantic side of the continent we find the New York Times reporting on May 9 that the inventory of homes for sale in the Fort Lauderdale area has quadrupled, year over year, to 20,000. Ouch! I almost feel sorry for all those speculators in Florida. Ok, not really.

On May 15, 2006 Marketwatch reported “U.S. home builders have turned negative on the housing market for the first time since just after 9/11, the National Association of Home Builders and Wells Fargo said Monday. The NAHB/Wells Fargo housing market index, a builders’ sentiment gauge, fell six points in May from a revised 51 to 45, the lowest level since June 1995, the industry group said. The index shows more builders say the market is “poor” than say it’s “good.” The index has fallen 23 points in the last seven months. In May, builders’ assessment of current single-family home sales fell to 50 from 55. The assessment of future sales dropped to 54 from 59. The assessment of the traffic of prospective buyers dropped to 32 from 39.”

Remember those mortgage defaults I mentioned reaching all time highs? Those numbers are starting to look rather tame. Real estate consultancy RealtyTrac reports, “A total of 323,102 properties nationwide entered some stage of foreclosure in the first quarter of 2006, a 72% year-over-year increase from the first quarter of 2005 and a 38% increase from the previous quarter.” When you factor in the massive numbers of homeowners that unwisely chose to purchase their home using an adjustable rate mortgage at the bottom of the rate curve, it becomes very apparent that we have not even seen the tip of the default iceberg.

How big can the default numbers get? It really depends on two factors. One, how many people chose to finance with ARMs, and two, how high are interest rates going to get? To give you some idea of the numbers of ARMs out there, I offer up one of the most expensive markets in the country, San Diego. In 2004 and 2005 nearly 80% of all homebuyers in that highly overpriced market used adjustable rate mortgages. Get the picture?

There is little doubt that middle class America has born the brunt of real estate run up, but how has the higher priced market fared? Historically, when the stock market is offering up nice returns, as it has been lately, higher priced homes tend to sell very well. Not any more! A close look at Toll Brothers’ sales finds them off a staggering 32%. Surprisingly, instead of scaling back their building plans and focusing on reducing inventories, Toll Brothers has announced a ramp up in production. The Dow Jones reports, “Toll Brothers plans to open 80 communities during the next six months, and expects to wrap up fiscal 2006 with 295 subdivisions, up from 230 in fiscal 2005.”

With summer upon us, the next few months are going to be a crucial test of the housing markets flexibility. If agents continue to advise clients the market is simply cooling down and keep pushing those high prices, things may get stagnant very fast. Buyers aren’t stupid. At least I hope not. With a little patience, the seller’s market could quickly turn into one of the best buyer’s markets in years.

My stance is essentially the same as it was last month. Wait out the rising rates, continue to save, and resist the temptation to buy into a market that looks primed for a fall. Don’t let those attractive offers of upgrades from builders lure you in. Properly timed, a buyer could not only get that nice upgrade package, but could also wind up paying thousands less for the home. Builders are in the business of selling homes, not holding onto them. If the market moves, they will move with it. They really have no choice. Buyers do. Make a good one.

Chris Yarbrough writes for Ebay Guides, a free resource site with hundreds of articles and guides. You can view the housing guides at http://www.ebay-guides.com.

Tags: home buyers, Home loans, Home sales, housing market, housing sales, intere, loan, loans, real estatehome buyers, Home loans, Home sales, housing market, housing sales, intere, loan, loans, real estate

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