Interest only morts all the rage

[cute fuzzy bunny]

Yep, comparing my home appreciation earnings with my investment earnings (if you take out the stock option grants), its no contest. I've almost made enough off of 3 home sales and the appreciation on my current one for a spartan ER.

 

[KB]

In order to fund my ER, I will be selling my gold mine of a home and living off the proceeds.

If I need to, that is.

 

[Nords]

Here's another article from our Sunday paper.

"Many Hawaii homeowners have gambled their homes that interest rates won't soon rise too high for comfort."

I think we can all see where this is going...

 

[al_bundy]

Notth - Of course, here is the latest editorial in the JUne 18th edition of the Economist: "We have been warning for some time that the price of houseing was rising at an alarming rate all around the globe, including in America. Mow that others have noticed as well, the day of reckoning is closer at hand. It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years. This boom is unprecedented in terms of both the number of countries involved and the record size of the house-price gains. Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history. The bigger the boom, the bigger the eventual bust. ... The whole world economy is at risk ... The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion."

Well, Mr. Economist editorial page writer, tell us what you really think!!

I read that article as well and it amazes me that people go to school to learn to write hundreds of words that really don't say anything.

 

[al_bundy]

I live in NYC as well and I'm one of the people that think that there is no bubble here even though prices are very expensive. To buy a home in california and most other places you don't need any money and good credit is not a requirement in a lot of cases. Financing is easy to come by and all you need to close is to line up the financing and have all the documents prepared.

For us NYC people that own co-ops we know that getting a mortgage is the easy part. We have to be approved by the local equivelant of a HOA. They do a full background check and you have to show them all your finances. By this I mean you give them several years of tax returns, several months of bank statements all your investments and other information. In my case it meant I had a private investigator call me and give me 2 hours notice that he is showing up at the address I provided in my application to collect more information. And they also look at your mortgage application. And they interview you and your family and pets. They can deny you for any reason and you can't sue unless it's something like racial discrimination. And even then the coop boards win 99% of the time.

Most co-op boards require 15% or more down payment and many require 6 months of liquid assets in the bank after you pay your downpayment and closing costs in case you lose your job after you buy. To discourage investors many boards also require that you live in the apartment 2 years or more before they let you rent it out.

From what I remember the reason for the drop here in the late 1980's and early 1990's was because the co-op boom happened in the 1980's. The big developers sold the buildings to their rental tenants and renters became owners. Part of the offering plan was a clause to allow the new owners to sell to anyone they wanted without board approval. I bought my place in Queens from it's original owner and didn't have to go through board approval. People decided to flip and this caused a glut of inventory and some apartments dropped by 80% in value. These days the vast majority of apartments are occupied by owners who plan to live there and the currrent prices are too expensive for many investors.

 

[Nords]

One of our local newspapers had an interesting graph on Sunday. Apparently it wasn't worth preserving online so I'll have to describe it.

It plotted 10-year trends of home prices between 1966-75, 1976-85, 1986-95, and 1996-2005. Keep in mind that by 1996 the Japanese bubble had been over for five years and home prices had dropped by nearly 35%. If ever there was a time for starting a bubble from the basement, this was it.

The first three 10-year periods showed home prices up more than 100% over each decade. All three decades hit 100% no later than year eight (one as early as year five) and in some cases they went up as much as 125%.

For the last decade, prices actually dropped another 10% during the first five years and didn't start rising steadily until after 2001. The decade's total price rise has only been 70% (so far) and that's all been during the last four years. Despite a low, late, slow start (or because of it?) the % rise has still been less than the three earlier decades.

If this decade is the same as the earlier three, prices could run up another 30% before it peaks. Unbelievable.

Ironically we bought our "dream house" within a couple months of the housing market's 10-year low. (We made the offer five years ago today.) I don't think we'll ever time ANY market that well ever again. Not bad for a hobby of looking at open houses, and it explains one of the reasons why the house is up so high from our purchase price.

BTW, Hawaii has the nation's lowest unemployment at around 2.7%. Only ~1000 people filed unemployment claims last week. Mortgage rates just hit a 40-year low again, and this time they really mean it...

 

[ESRBob]

So here is a slightly contrarian view:

Agreed that the interest-only loans, adjustable rates, and sloppy lendig practices are a worry to me. The costs people are paying for new houses isn't such a worry, though, because I think people basically bid things up based on how much they can afford to pay, and low interest rates mean they can afford a lot.

When the going gets tough, (if interest rates rise) it will affect people at the margin but most people will just grit it out and stay put.

Landlords won't necessarily get tanked (rents won't necessarily go down) because they are already so (relatively) low and don't seem to be connected to house prices. Landlord's dreams of capital gains, or anybody's dreams of capital gains bailing them out (the only reasonable logic behind the interest-only ARMs imho) are made of pretty fragile stuff.

Like Al Bundy indicated, there is a lot of capital sloshing around, so even if some homeonners are overextended, it isn't clear that they are a significant proportion or likely to become a significant problem. Lots of the buying is being done by deep pocketed people who are speculating,and even for those who aren't, bankruptcy is harder to do these days, so all but the most dire cases are just going to have to wear responsibility for these deals, even if it means evaporating a whole lot of their equity in the process or being stuck in a home for several years that you can't afford to sell.