Bursting of the Bubble?

Ken Rosen, economics professor at Berkeley's Haas Business School and Director of the Fisher Center for Real Estate & Urban Economics, was interviewed in today's CBS MarketWatch. He sees rising rates delivering a much-feared housing bust. Yes, a bust and not a "soft landing" as is the general consensus lately. According to Rosen, current home prices are simply not sustainable, and he expects sales to decline measurably from their historic highs. With the median offering price of a home in Burlingame hovering around the $1 million mark, I hope Rosen is right about the bubble bursting. What is also worrisome from a macroeconomic standpoint is the rise in consumer debt and the erosion of home equity ownership. Due to the housing boom of the last six to seven years, more people now own homes. But because of the development of home equity loans and lines of credit by banks and mortgage lenders, overall "ownership" of homes is actually being eroded as many have shifted existing consumer debt (typically, car loans and credit card balances) to these new secured credit facilities. Lenders are even making it a practice of marketing and packaging equity loans and lines of credit with all new mortgage applications. The problem is homeowners are not merely shifting pre-existing debt, but they are taking on unnerving levels of new debt. With a $30,000 to $50,000 low interest, tax-deductible line of credit, why not? And naturally, as a result, consumer spending has been robust these past few years, even as the economy suffered through higher unemployment and spikes in the consumer price index (CPI). This is all fine and good in an environment of steadily rising home prices (and appreciation). But when home values stagnate or decline, this creates enormous problems on a macroeconomic level.