Residential boom continues to roll right along

Once again I have snuck off for a few days’ vacation with the family, this time to the coast of Maine, in Harpswell on the peninsula south of Brunswick. It is a truly beautiful view looking across Casco Bay.

The lobstermen are an interesting bunch to watch. Some are sole practitioners with small boats of 20 to 25 feet who haul their pots by themselves. One fellow hauled 32 pots out in front of my observation point before moving on to another string of his buoys. We rowed out to his boat to buy lobsters from him for $4 a piece. So I assume that is the most he gets wholesale at the pier. They sell on the pier for between $8 and $10 each. Don’t even ask what you pay in the restaurants in prime summer season.

There also are two-man boats slightly bigger and more expensive but able to pull more pots. Then we saw a few three man boats 35 to 40 feet with open sterns. Alfred Taylor would be proud of these guys — not a wasted motion. I keep saying lobstermen because we saw only one lobsterwoman so far. It is hard work, fickle, and like commercial fishing, subject to boom and bust. Not bad work on a 78° summer day, but in the evening with a string of thunderstorms rolling across Casco Bay, not so romantic. Add in spring and fall when it is cold, damp, windy and raw, it’s a hard way to make a living.

Driving around you see lots of old boats up on stilts, piles of wire lobster traps and a few used vehicles. Many people just off the coast or outside of metro Portland struggle to make a steady living. And housing prices are out of sight. I saw a photo ad for a shack with an ocean view (not waterfront) for $194,000. This is a teardown, but perhaps the septic system (if there is one) is good, filtered to some degree. Wow! The typical rule of thumb is the site cost is one-quarter of the total house cost. A $200,000 lot translates into an $800,000 home. There are plenty of those around here. It occurred to me that if you want to have a home here the secret is to save your pennies and wait for the next downturn so you can buy low.

I browsed through my monthly issue of Realtor magazine while I ate my breakfast on the deck. One article went on about the rise in the residential interest rates (from 5.45 percent to 6.3 percent for a 25-year fixed-rate mortgage). This begs the question of whether this will knock people out of the housing market and finally cool things off. Not so, says Realtor, because the industry is much less interest rate-sensitive than it was 10 years ago, largely due to the growing popularity of adjustable rate mortgages, which historically have rates about two percentage points below the rates for 30-year fixed-rate mortgages.

So if interest rates continue to move up this year (the current consensus) there will be a considerable number of households looking for ARMs to blunt the hike. We already saw this, given that from February to April the share of ARMs doubled from 15 percent to 30 percent of mortgages, according to the MBA. First-time homebuyers also can now borrow from their retirement plans at no penalty to secure a home.

While residential brokers think this is grand, I am not so sure. This smacks of leveraging in a very hot residential market. Those ARMs got a lot of folks in trouble in the early 1990s following the super-heated residential real estate market of 1988 and 1989.

I am not suggesting that we are about to experience the deep recession of the early 1990s, but I am convinced that a growing number of households are getting deeper and deeper into debt. Rising interest rates and a softening economy can catch these folks flatfooted. The banks are making record profits largely on mortgage origination fees, but current residential appraisals are well past historical norms. Even a 20 percent correction in values will have many folks upside-down on loan-to-value and income/debt coverage ratios.

Time will tell. In the meantime, I will return to my summer reading, “Havana,” by Stephen Hunter. nhbr

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE) and director of the Greater Manchester Chamber of Commerce. He also sits on the board of The Initiative for a 20/20 Vision for Concord, N.H. He can be reached at wbn@nortonnewengland.com.