Living In The Bubble (America's Coming Mortgage Crisis)

The American Conservative ^ | Feb. 10, 2003 | Robertson Morrow

[Middle Man]

From the security of their own homes, many sneer at the get-rich-quick crowd that lost money when the tech bubble burst. But many who would throw stones are living in glass houses—barely maintained by fragile second mortgages.

The brash sales pitches, reckless spending, and short-sighted decisions that fueled the dot coms’ rise and fall have taken over the mortgage market. Everyone now knows about the tech bubble because it has already burst; fewer recognize its near neighbor, the mortgage bubble because they are living in it.

In the third quarter of last year, home mortgages increased at a record annual pace of $724 billion—accounting for 70 percent of the entire increase in personal and corporate debt. Increased home mortgage borrowing has reached levels almost twice that of corporate borrowing during the bubble years.

[Steven W.]

Mortgage rates reach record lows, people refinance and the amount of mortgages, obviously, goes up. I'd think a "conservative" magazine would cheer the free flow of commerce & real estate, but NO!

[Middle Man]

Part of the bigger problem is that there appears to be no end of capital available so people can go further into debt. And we Americans save little (or none) and spend much.

[dead]

You must be reading my mail.

[Wolfstar]

Thank you for posting this very informative article. I've been thinking of buying a home. Now in the process of researching what's available in my area (Los Angeles county). Prices are extremely high even for the most modest crackerbox houses on modest lots in so-so neighborhoods. Something in my gut has been telling me the bubble is going to burst sometime soon. There has to be a point when common sense prevails, doesn't there? I mean it just doesn't seem possible that people will continue to pay exhorbitant prices (thereby moving the prices up still further) for 50+-year-old, stucco-over-frame, 1000 sq. ft., 2 or 3 bedroom, 1 bath, boxes sitting on 5000 sq. ft. (or smaller) lots, many in neighborhoods that have seen better days.

[NorCoGOP]

Mortgage rates reach record lows, people refinance and the amount of mortgages, obviously, goes up.

What I see, (I am a broker) - there is something to be potentially concerned about - lots of people refinanced, which does not necessarily mean the amount goes up, but, lots of those people took cash out from equity, or, took out 2nd mortgages - that's where the value in mortgages really have increased.

Property values are not growing at the pace they were even six months ago, and, in certain high-end neighborhoods in northern Colorado, they are coming down.

If the downward trend for whatever reason picks up steam, so ALL values start coming down, people will be in REAL trouble...especially those that right now are mortgaged to 100% value on their homes. IF (big if), values do drop - people will owe more than homes are worth, and will be unable to sell...starting a possible foreclosure wave.

Best bet - keep under 80% loan to value if you can - it gives you (1) flexibility and (2) avoids pesky mortgage insurance.

[VRWCmember]

Some of the points of the article are quite valid, but some parts of it are rather alarmist and probably unfounded. A balanced approach would be to observe that the rapid increase in "home equity" loans and overextension of second mortgages puts many "homeowners" in extremely precarious financial condition. To extend this out to say that we are on a "mortgage bubble" with dire national economic consequences is probably a bit of a stretch.

[litehaus]

Selling out..............Buy something back later..MUCH cheaper.

[VRWCmember]

Excellent point. If the total mortgage value is less than 80% of market value of the home, the financial risk is obviously reduced. Further, if you can arrange with your financial institution to have your P&I payment paid every two weeks at one-half of the monthly amount you will make one extra payment every year, you might be able to get a discount on the interest rate, and the accelerated payments (two weeks vs one month between payments) will reduce the interest you pay and accelerate you retirement of the principle. This alone will result in our 30-year refinance being paid off in only 21 years.

[NorCoGOP]

An even better way is to simply pay an extra 12% each month - you'll avoid some of the "administrative costs" some lenders put on biweekly payments, but achieving the same result.

[ARCADIA]

cheer the free flow of commerce

What free flow of commerce?

We are talking about a distortion which uses a publically subsidized program to generate consumer spending. It is a perversion of a program designed to increase our stock of affordable housing. At the end of the day we will max out our ability to barrow and the housing boom will go burst. Consumer spending will drop along with housing values, and tax payers will be saddled with an incredibly massive bailout of our financial institutions. This thing will make the savings and loan bailout look like a parking ticket.

[jocon307]

I agree with you. I'm hoping to finally buy a house myself one day in the not to distant future, but the prices around here (Northern NJ) are ridiculous. You too can live in a ghetto, or near ghetto for only 1/4 million dollars. I don't get it. Of course, around here, they say it is illegal/legal immigrants living with an overabundance of folks in a one or two family house. I guess that might be true in LA too. If we don't end immigration, at least have a moratorium we are really doomed in this country.

[stylin19a]

why 12% ?

[LS]

It is not true that Americans don't save. The economists at the Milken Institute did a comparative study of the U.S. and other industrialized countries. When you account for private and employer-contributions in pension plans (savings); health-insurance benefits (one of the MAIN reasons people save in free societies); and the incentive of mortgage interest deduction, in fact we save at almost the same rate as anyone else.

Why do people save? 1) for retirement (covered with pensions); 2) for emergencies, especially medical (covered with health insurance) and for 3) big-ticket items, esp. homes (which have the tax deduction incentive). I have never bought the notion that Americans don't save. We just have mechanisms such as employer contributions and health insurance that mask what we would normally put aside in other situations.

[LS]

Don't count on the "bubble bursting." Housing prices in southern Ohio were flat for a few years, but they are rising again.

[Lancey Howard]

Rates are at their lowest level since about 1966 and people all over the country are finding that they can get "more house" for their monthly mortgage payment. As a result, the competition for housing is intense and this drives up prices. People who are not moving but are simply sitting tight in their homes are seeing the value of their homes soar, providing a tempting equity position for people who then figure they can borrow against that equity at a rate lower than any other source. This is a very handy way of rolling car debts and credit card debts over into a consolidated first mortgage loan, thereby lowering their interest rates substantially, lowering their total monthly outlay substantially (spreading it out over 15 to 30 years), and providing a tax deduction (mortgage interest is deductible, whereas car and credit card interest is not). Frankly, it would be foolish for a homeowner to let the opportunity pass.

On the other hand....
When interest rates begin their inevitable upward trek, guess what will happen to home values? Home values will decrease - - it has happened before, as recently as the mid '90s in this area - - and if the economy goes into the dumper for real (as opposed to Democrat / liberal news-media propaganda), then people will have home mortgage debt equal to or higher than what their homes are worth. If there is a flurry of foreclosures, the poop will hit the fan for sure. In any event, since loan-to-value ratios have stayed the same as always for new lending (typically 80% maximum for "cash out"), there could come a time where mortgage debt exceeds the total residential real estate value for entire regions. That is not a healthy scenario for investors.

[NorCoGOP]

It's the same as paying an extra mortgage payment each year - well, 8.33% is - my mistake on 12% - I must have been thinking 12 months...long week already.

[FITZ]

Mortgage rates reach record lows, people refinance and the amount of mortgages, obviously, goes up.

That would depend on why they refinanced. If I owe $80,000 with an interest rate of 9% and I refinance to get a lower interest rate of 5%, I would still only owe $80,000. If people are refinancing to get out cash then they're doing the opposite of investing, and if they're buying foreign made products it only hurts our economy by adding to a very large trade deficit that is being purchased with debt.

[stylin19a]

thanx for clarifying. It sounds like a good deal, if one can afford to do it.

[Snerfling]

Part of the bigger problem is that there appears to be no end of capital available so people can go further into debt

Anyone who lived through the 70s saw what happened to the economy when the price of gas tripled. When the price of gasoline drops below $1 this time around, a similar, but reverse effect will occur. When mortgate rates drop to around 5%, we'll see another huge wave of re-financing.