Interest only morts all the rage

This is a dual edged sword. People don't save as much to buy a house these days and the housing prices have gone up so much it's hard to get into a house.

I'm so glad I bought my first house a LONG time ago before the prices were so high in CA.
 
I'll say a prayer for these people with interest-only mortgages.

I think we need to stop beating up on financial planners for a while and start beating up on bankers. They are getting to be worse than used-car salesmen.
 
Not to change the subject so quickly, but the other problem (at least in the northeast) is that people can't afford to buy a lot of the 2-family homes here selling for $700K, so they are turning them into 2 unit condos selling for $400K each!
 
We want to thank those people who are willing to go through great length to buy a house so that we can enjoy the price appreciation. We should also extend our appreciation to the lenders who make it so easy for those to realize the American dream.

Spanky
 
retire@40 said:
I think we need to stop beating up on financial planners for a while and start beating up on bankers. They are getting to be worse than used-car salesmen.
Click to expand...

I think one of the reasons for this is that for home mortgages, origination, servicing, accepting credit risk, and funding are now often performed by different players. For example, investers in mortgages need not be involved in credit risk decisions, origination or servicing. So if you have originators who are interested in their origination fee, and they have no money invested in the loan and won't service it, their self interest is to get that loan made.
 
Jim Grant recently reported that housing usually accounts for 8-10% of GDP. Than is based on the period 1983 through 1998. Now it’s 17%, more than 3 SDs above the mean. What is the limit?

I don't know, but remember, you can only pay for housing with money earned somewhere else, so I would guess it's getting close right now.

My only current interest is I might like to re-mortgage my place, and put the money in the bank waiting for later opportunities, even though there would be a carry cost of a few % pa.

H
 
LOL! I love the quote, "people are getting a lot smarter about their mortgages!" Yeah, right! Maybe 1 out of a hundred is investing the difference between these loans and a traditional 30 year. My coworkers use the money to buy fancy cars and useless toys. I'm just getting ready to get mad when all of these people go, "oh, my flipping/speculation/no money down adventure is over? O.K., I'll just walk away from all this debt and contribute to the crash, since a couple years from now everybody will lend to me again anyway.". :mad:
 
  I'm a bit puzzled as to how these folks are saving so much on interest-only mortgages ... if I remember correctly from my own mortgage, the first few years are heavily weighted toward interest, with darn little principal being paid...

   Don't know ... I suppose if a person is only going to be in the house for a couple of years, it might work out. But otherwise, it sounds like a ticket to foreclosure.
 
Basically they make the first 'n' years interest only, and defer the principal payment...a typical 30 year $1200 payment might become $1000 on an interest only basis. After a few years the payment amount kicks up higher. The pitch is that you'll be making more then, and the house will be worth more, or you'll have moved and your increased equity will translate into profit.

Doesnt that sound great?

Only problem with this scenario is if your wages dont go up (and wage increases have been nada the last 5 years), your home stops appreciating in value (how much higher can these things go anyhow?) or you end up staying in the house a long time, in which case you get soaked on the overall interest payments.

Ha Ha...the limit is when even with these weird financial constructions nobody can afford even a modest home. No buyers, no uplift.
 
  Oh yeah .. sounds ducky!   I'm quite happy to have my mortgage paid off.

   I'll have to find out how popular these things are in my corner of the Midwest, since the housing prices are substantially lower.   God knows we have enough defaults on the no-money-down, adjustable rate wonders .... ::)
 
Amazing how stacked the real estate industry is against the buyer. Realtors, appraisers, mortgage lenders, lawyers, even home inspectors, sugar-coating the deal to keep it moving forward.... so EVERYONE can get paid.

"oh, my flipping/speculation/no money down adventure is over? O.K., I'll just walk away from all this debt and contribute to the crash, since a couple years from now everybody will lend to me again anyway.".
Click to expand...

In the early 90's I saw/met many bankrupt real estate investors bidding at auctions. Housing could be had for 10 cents on the dollar; cash was king. Having seen the top, the failed investors knew they had to get back in (at the bottom).

Put your seat belts on!
 
When I was shopping for a mortgage about a year ago I had one mortgage broker try to sell me on an interest only loan. It was based on the 6month LIBOR rate plus about 1.75%.

At that time, the 6mo LIBOR was around 1.6% so it was a really low payment but I'm still glad I got a fixed rate loan because the 6mo LIBOR has since doubled.
 
I own a house in San Diego - it makes up about 1/3 of my net worth.  Although I believe there is a housing bubble, just as I believed there was an internet bubble in the stock market, I'm having a hard time believing the value of my house will get cut by even 25% when the bubble pops.  When I bought in 2000 everyone was convinced it was the top of the market then.  Since then it has appreciated over 100%, (maybe more).

Sure the people who flip houses and are mortgaged to the hilt will get hurt when the music stops, but for someone who owns his house free and clear, it may be the best investment I'll ever make.   Real estate is a hard asset that increases in value offsetting the loss in the purchasing value of the dollar.  I wish I felt half as comfortable about my other investments as I do about real estate. 
   
I'm inclined to think the burst of the real estate bubble will hurt the rest of the economy more than it hurts the value of real estate itself. 
 
It's just academic for us, we're not moving. We can watch the carnage from the sidelines.
 
I'm having a hard time believing the value of my house will get cut by even 25% when the bubble pops. When I bought in 2000 everyone was convinced it was the top of the market then. Since then it has appreciated over 100%, (maybe more).
Click to expand...

I hope you are right for your own shake. Why is it so difficult to believe that an overheated real-estate market could drop by 25% when you said that it has grown by more than 100% since 2000?
 
Because it might just decide to go sideways for 10 years. If you like living there, then selling and moving somewhere you like less isnt a bargain. Selling and renting into a 10 year sideways market might see your rents catch up with home price increases and no dips to buy into.
 
If the bubble pops you better believe home prices will drop 25% and that is if the correction is mild and not long lasting. What will happen is that a sellers market turns into a buyers market. Buyers become picky and wait for better deals and many sellers try and hold out a year or 18 months for prices to firm up. Many sellers will list their homes at unreasonable prices in denial of the new conditions. They will sit and hold out as long as they can. Those sellers that must sell to relocate for employment take a 10% hit right at the beginning of the downward price curve. If they have owned the home less than say 5 years they will take more of a loss than is reported because brokerage fees and deferred maintainance costs add to the problem. Their actual losses will be above 15%.

As housing market inventory grows beyond 2 years at current sales rates and the seller hold outs begin to face reality the fall in prices, a reported drop of 15% - 20%  after about 12 months is common as the second selling season ( April - August) arrives. Inventory continues to grow with 'for sale' signs seemingly on every block. The newspaper by now will have stories of buyers waiting for further drops in price and homes having recent upgrades representing the few recent sales.

Then the 18 month holdouts must begin to accept reality and the prices will reach a 25% drop. The McMansions for $1,000,000 plus will be hardest hit and will drop to 30% + and the inventory will be at a mulitple year rate of curent sales.

This is what happened in Austin a couple years ago and was considered quite mild with full recovery three - five years hence. Be prepared for such drops over a 12-18 month period. The lower end housing market will drop in 18 months - 24 months as forclosures rise and this happened before anyone used interest only ARMs.

I would expect the next 'mild' localized downturns to have a greater impact than the mild one Austin experienced due to the 100% increases on both coasts in the last 2 years and the 'creative financing' of the mortgage market.

You are in denial if you think recent price run ups will protect your equity. The hit will be harder and a 5 year + timeline will be necessary to turn the market to neutral or a sellers market. A decade may be more likely during the next bubble correction and the prices may never return to the peak in our remaining years.

Take heed my friends in California, D.C., NYC, Miami, et. al.

I perdict a 50% drop in some areas. Woe be to those who drew out equity for life style reasons or who bought a second home with the money from HELOCs.

The least severly hit and quickest to recover will be resort and rural retirement destinations in smaller towns.
 
Ol_Rancher said:
The least severly hit and quickest to recover will be resort and rural retirement destinations in smaller towns.
Click to expand...

I don't agree with a lot of what you posted, but I sure hope your last
sentence is correct.

JG
 
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