 |
 |
 |
|
 |
 |
 |
|||
 |
 |
 |
 |
Posted on 08/06/2006 8:59:22 AM PDT by ex-Texan
BOSTON (MarketWatch) -- It is becoming increasingly obvious that financial advisers, real estate experts and parents will someday point to what is happening in the mortgage market today and use it as a cautionary tale of what can go wrong when a buyer stretches to get too much house during a market that seems invincible.
Real estate has been booming in most markets over the last five years or longer, fueled by interest rates that reached four-decade lows and by consumers who used new mortgage products to extend their buying power. Many home buyers stopped worrying about buying a home and instead worried about their ability to pay for one; rather than shopping for a deal that allowed for a lifetime purchase, they looked for a mortgage that allowed them to buy the most home for the lowest current payment.
So long as rates stayed low and housing prices continued to move up strongly, that strategy was a good one. And those things kept happening, so that homebuyers ignored the warnings issued by many mortgage experts about what would happen when times changed.
Well, times have changed.
The popularity of adjustable-rate mortgages means that nearly 25% of all outstanding U.S. mortgage debt is due for an interest-rate reset within the next two years, according to Economy.com, a Web site run by Moody's Corp. Some $400 billion in loans will get a new rate this year, and another $2 trillion are set to move in 2007.
Those moves won't be pretty. Just two years ago, the prime rate stood around 4%; today, it is more than twice that. As a result, payments on some ARMs will double too. The current forecasts from a number of experts have defaults on those loans increasing by 10%.
"There is no apples-to-apples comparison from the kind of mortgage someone could get a year ago and what they can get today," said Anthony Hsieh, president of LendingTree.com. "As rates rise on adjustables, there are steps people can take to reduce the sticker shock, but they're probably not going to be too happy with what they have to swallow now. ... They had a 42-year low in mortgage rates, but they were more concerned with how much they would have to pay each month than how much they could afford and buy a home reasonably."
Plenty of bad news
For someone who purchased a home using an ARM -- or taking advantage of some of the attractive teaser rates that were available over the last few years -- there is plenty of bad news if they need to refinance now. Obviously, that starts with current interest rates. Moving to a 30-year fixed-rate mortgage now means looking at rates north of 6.5%, and the longer a consumer waits, the bloodier that transition is likely to be.
But if the house was purchased recently -- and with the ARM keeping payments low -- there hasn't been much equity build-up; if the home is in a market that is now cooling down, the owner's equity is further impaired.
"People were gambling that their income would get to a point where it was high enough to pay for the home at some point," says Greg McBride, senior editor at Bankrate.com. "They also were gambling that the market would help them build enough equity that they could refinance if they needed to. Now they may need to, and those gambles aren't paying off."
Some of those consumers will become default statistics. Others will have to downsize, or change neighborhoods, in order to get a mortgage that is more affordable.
There's a problem with that "smaller house" strategy too, at least in markets where prices are on the decline. A homeowner who put little down and who built little equity -- and who lives in a market where prices are on the decline -- may find that a small step back is not sufficient to actually cut mortgage payments.
How bad is it?
McBride suggests that consumers who are facing adjustable-rate sticker shock should try to determine now just how bad the movement might be. From there, they can decide if it's time to make a change so that they don't get slammed.
Many adjustable-rate mortgages include annual and lifetime caps on the interest rate that can be charged, so homeowners may not see the full impact of sharply higher rates immediately. A 2-percentage-point annual cap is fairly common.
To see how bad an adjustment hit might be, consumers should look at their mortgage paperwork to see when the reset occurs, the rate that the mortgage is tied to and then the margin that is used for the adjustment.
The Libor rate, for example, has moved from roughly 4.2% a year ago to about 5.6% today. A mortgage that is pegged to Libor plus two percentage points, therefore, will adjust up to about 7.6%.
A homeowner looking at that kind of rate could refinance into an average fixed-rate deal and be better off. Says McBride: "There is still time to get off the tracks before the train gets closer, but people need to act now. A 7% mortgage today beats an 8% refi a few months from now.
"People's choices are only going to get uglier, and plenty of people are on their way to trouble. ... For everyone who has avoided this trouble, they're going to look back someday -- when their kids are looking for a mortgage and are tempted to stretch too far by using an ARM -- and have stories to tell about how they saw a time when everything that could go wrong with that strategy did go wrong."
Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
"Some $400 billion in loans will get a new rate this year, and another $2 trillion are set to move in 2007. * * * Those moves won't be pretty. Just two years ago, the prime rate stood around 4%; today, it is more than twice that. As a result, payments on some ARMs will double too."
Foreclosures are going up every month. Soon to reach log jam proportions. Already, television ads are pushing buying foreclosures as the next big house flip get rich quick scheme. But wait until this time next year. Are you getting the picture, yet? Whatever Or just check my FR page if you want to learn a bit more. For all the naysayers out there: "Nothing to see here. All is fine in my neck of the woods. I'm so tired of this bubble media hype. Lock your doors and windows. Time to move on."
*Ping*!
I knew this was coming...that's why I sold my house late last year for a hefty profit, and am renting until this whole mess blows over...probably by 1Q or 2Q 2007.
|
|
|
|
|
|
|
|||
|
|
|
|
You must be in the real estate or mortgage game . . .
Well, in some markets they had little choice as long as they felt they just "had" to buy a house. The ubiquity of these mortgages pushed what would in normal circumstances have been moderately priced homes up to very high levels, because everybody was getting an ARM. The proper response was for people to simply walk away from those bad deals and keep renting until the market stabilized. But that would have flown in the face of the American Dream (copyright 2004 - Ameriquest Corp.) and so was never considered as an option.
No, just the anti-goldbug, anti-anti-free-trade, anti-minimum-wage-hike, anti-anti-fiat-currency, anti-anti-investment game.
Just Check This Out, Dude Nada por nada. Whatever.
The 500K to 1mill houses around here are going up for sale at a huge clip. These are new sections and have only been occupied for one to three years. Our Saturday real estate news is getting to book size.
We also have an increase in auction notices.
There. I'm done.
Phoenix has always had a lot of high-end rentals available, which you could get good deals on if you agreed to rent for a year. (Think of the resorts in winter going begging in summer.)
With the advent of ARMs things got even worse--most 'renters' were busing buying inflated housing prices: e.g. one acquaintance whose home went in value in 1 year from $160,000 to $280,000.
So the rental places got desperate. I locked in rent for two years, at a lower rate than before the crisis.
Will wait to pick up a nice foreclosure (here or elsewhere) for a steep discount. Remember that sub-7-percent mortgage is still very low by historical standards.
"Buy low, sell high".
Cheers!
We hit the trough with a 5.25% fixed .... but spinning the cylinder with one chamber filled (ARM) was never an option.
Buying in the Houston market was also a plus ... only properties inside the inner loop are overpriced. I've got plenty of house, plenty of yard and a 20-25 minute commute.
Right on. Same here. Took a 5.75% in 1998. Told the loan officer to stuff the ARM. Now home prices are going nuts in Salt Lake, too. I can't believe the prices I'm seeing demanded by sellers now. Maybe when the correction hits I can pick up a nice foreclosure.....
"People were gambling ... "
And most gamblers lose, sooner or later.
Let me know if I need to explain this to you.
Refinanced my 30 year 8.25 three years ago with a 15 year 5.5% fixed. If I sold and bought the same house or similar house I'd be tripling my property taxes. Here in Fla property taxes cannot increase more than 2% on an annual basis so I'm still paying close to what I was paying back in the early '90s. Those who bought within the last few years are paying thousands more in taxes for a similar home because of appraisals based on ever increasing market values. Having an ARM, watching your home value drop and still having to pay triple the property taxes of your neighbors who've bought in the 90s is more than sobering.
oh no...we are doomed again...just for today...
Heeheeheeheehee!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.