The senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS® recently penned an article for Realtor® Magazine titled “Keep a cautious watch”. The three trends he suggests we keep a cautious eye on:

∙ Speculation: This form of investing can be risky when buyers go out on a limb with interest-only mortgages and other forms of financing that make sense only in a market of continuing strong price gains. If those gains ease this year, as we expect them to do in some markets as sales cool, investors are exposed to potential losses.
∙ Soft underwriting: We’re seeing an upward swing in adjustable-rate loans and other forms of alternative financing at a time when 30-year fixed-rate financing remains at a historically low 5.75 percent. With long-term rates this low, we would expect to see adjustable-rate financing at 25 percent of the market, but instead we’re seeing it at 30 percent to 40 percent of the market. [editorial note: closer to 70% in San Francisco]
∙ High price-to-income ratio: Home prices are rising faster than household income, particularly in states with the hottest markets. In California the price-to-income ratio was 32 percent last year, up from 23 percent in 2003. The greater the gap, the harder it becomes for households to buy. [editorial note: San Francisco’s affordability index now stands at 8% of households]

· Keep a cautious watch [Realtor®]