A "Frothy" Market - Another Recession

"In the United States, signs of froth have clearly emerged in some local markets where home prices seem to have risen to unsustainable levels." Alan Greenspan, Chairman of the Federal Reserve

Froth? I love it. A housing bubble but not.

When higher interest rates begin to discourage first time home buyers, increased regulation decreases lenders capability of offering creative financing options (ie: interest-only loans) and investors intuit the cessation of windfall opportunities housing prices will level or drop.This inevitably translates into a weakening economy as home equity extraction decreases so will consumer spending. Home refinancing wasn't to add money to the bank but to spend, spend, spend.

"The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more-exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny. To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is adding to the pressures in the marketplace."

If the past offers any guidance, housing prices tend to peak four to six quarters after the central bank first raises interest rates. The Fed has now raised rates for about five quarters. Short rates are preventing some first time buyers from entering the market and lenders are beginning to feel regulatory pressure about creative financing.

This may be the perfect storm leading to an inevitable recession.