As my Kos name suggests, I live in San Jose, home to some of the highest housing costs in the nation. This high cost of housing has brought on interesting and very dangerous means to finance these homes. To get a picture of what some home buyers are doing to purchase, please take a look at this must read article on MSNBC.com:
Homeowners place faith in 'exotic' mortgages.
As many of you have read Bonddad's excellent articles on the economy, jobs, the housing bubble, this article should come as no shock to you, at the same time the picture that emerges continues to cause serious concerns about the state of our overall economy.
More....
First, one paragraph that jumped out at me from the MSNBC article was this:
Interest-only loans haven't been this popular since the late 1920s; negative-amortization loans since the early 1980s California housing boom. Both those trends ended badly. But today, there are entire families of adjustable-rate, interest-only loans.
The article goes into detail regarding the use of non-traditional mortgages, and the danger they present to those who hold them. What is alarming is that many people are caught up in the view that housing prices will continue to double every few years, thus making their dangerous loans 'safe.'
Again, from the article:
Consumers who choose negative-amortization loans -- also called option ARMs -- are not locked into additional borrowing each month. Loan holders can choose one of four options -- a minimum payment that results in "deferred interest," increasing the mortgage balance; an interest-only payment; a payment that represents a traditional 30-year mortgage rate; and a larger payment that represents an accelerated 15-year mortgage payment. But a UBS study recently suggested that 70 percent of neg-am mortgage holders make just the minimum payment.
And then this jumped out at me, alarm bells going off all over the place:
But the idea that an interest-only loan can get you into a home you couldn't otherwise afford is a fallacy, other experts say -- unless you are the only one shopping with that kind of loan. As a rising tide lifts all boats, the availability of risky mortgages lifts all prices.
"An interest-only loan is an admission you can't afford the house you are trying to buy," said Bill Fleckenstein, president of Fleckenstein Capital, an investment firm. "The assumption is you will refinance. The unsaid assumption is prices are going up and you will get bailed out. These loans are being made when both sides must know that the loan wouldn't work if it weren't for this little fudge. ... But if the math doesn't work, sooner or later, you're going to be tripped up."
Manning has just completed a set of focus groups around the country quizzing people on their understanding of the mortgage market. The results were alarming, he said.
"What's intriguing about Americans is that they have bought into the world view that everything will be better in the future," he said. "People are willing to spend money because credit companies convince them that things will be OK. In our focus groups, people said they are counting on their house doubling in value in 5 years. ... People are in worse shape then I thought."
Americans have overextended their credit cards, and now are using the same lack of financial responsibility with mortgages, which has much more serious results.
Having lived in this area all my life, high home prices are nothing new to me, however there was a time when areas such as San Jose were 'affordable.' For instance, my housing tract was built in the early 70's, original owners included grocery clerks, nurses, teachers, white and blue collar workers and so forth. These homes, when new, sold for under $20,000. Unless these same people today take out these new risky loans, there is no way they can afford to live in this very middle class neighborhood. So, those who are buying either 1.) Have jobs with huge salaries or 2.) Are taking out these loans in large numbers.
Fast forward to now, our home for instance, is a 3 bedroom, two bath, almost 1700 square foot home. It has a nice floorplan, small kitchen, nice backyard and similar homes in my immediate neighborhood have sold for $680,000. We bought this house in 1994 for $219,500, with a 15 percent downpayment, and obtained a 30 year fixed loan. When we purchased this home I had to go back to work part time to help make ends meet. Even though my husband has a fairly well paying job, there is no way we could afford to purchase a home anywhere in Santa Clara County today.
Before owning this home we had a small two bedroom that we had tried to sell many times, and because it was small and older (near the SJ Airport as well) we had difficulty selling. When we did sell we ended up in a "hot" housing market, and basically we had to jump at anything that came up as we were in no position to outbid anyone.
The reason for going into all of this is that at no time would we consider an ARM loan. I had seen 18 percent interest rates, and truthfully knowing that we were never going to see huge salaries, banking on something that could ruin us was beyond my ability to jump into.
This is a serious and dangerous issue that, should it "burst" will cause economic problems worse then the dot com burst. And yet, it seems almost as if one is yelling "wolf" one too many times, as housing continues to fuel the economy, each month outpacing the month before.
Should this bubble burst (and it will in my opinion) we are all going to be effected, one way or another. Am I nuts to think that these loans, which are fueling this bubble are something that long ago should have been more regulated? Do people really realize what they are getting into? What happens if there is a downturn? Who will be "blamed?" And is this just more of who Americans have become, willing to live for the day and worry about the future when it gets here?
I don't know, but the article I posted, as well as all of Bonddad's posts should give all of us pause.
And now, the poll: