What does the buyer do in 2008 when his house is worth only about $ 225,000?
"In effect, the buyer has a negative amortizing loan. In three years, he will owe about $ 350,000 on his home."
You should KNOW that loans have a life-of-loan CAP on the amount of negative amortization. I recall 10 percent of the principle amount.
So using your example, the max neg am would be $30,000 NOT $50,000, and the $30,000 would be reduced by your principle paydown (unless it was interest only). And how rapidly that max is calculated depends on the index, the margin, the pay rate, etc. I expect it would take LONGER to max out than three years.
They also have a CAP on the year to year increase in the payment.
The reason I know is because I have used this type of loan, for twenty years. And since 1986 I have been BETTER off than had I used fixed rate mortgages.
Like I have said, you take RISKS, and if they turn out okay you reap the rewards.
Besides, most people have housing costs of some type, payments or rent. They are usually going to make their payments, or sell, or refinance if things get tight.
I will surely agree housing is slowing in many areas. In my area sales volume is down 22 percent from a year ago, but prices are NOT. It is one of the highest cost markets in the US, too. Median price is $622,000.
Buyers are shopping more carefully, but when they need a home they will buy one, to live in and enjoy with their family.
There is more to life than worrying every day about house prices. You can also worry about the stock market-high now. Or gold prices-high now.
Home ownership is at an all time high in the US. I expect the Fed will stop raising rates, lest they harm the economy.
Live in it.