July 19, 2005

Bad Ideas

The housing market is seriously screwed up. Housing is just too expensive particularly here in California and other hot spots. Now the classic economic supply/demand solution is that if housing becomes too expensive, people will not be able to afford to buy, demand goes down and so do prices. There seems to be a small problem: Banks are now offering "exotic" mortgages so people can buy homes that they can't afford:

Welcome to the high-stakes world of the negative-amortization loan. With skyrocketing home prices in America’s hottest markets, lenders have become increasingly creative in their efforts to stretch consumers into pricier homes.

Interest-only loans, nearly unheard of three years ago, have jumped in popularity. “IO” mortgages, which come in many shapes and sizes, can shave 20 to 30 percent off monthly payments because they temporarily relieve borrowers of the need to pay any principal. But after that temporary reprieve, mortgage payments jump sharply. Fully one-third of mortgages opened last year were interest-only loans, causing a stir of concern among economists including Federal Reserve Chairman Alan Greenspan.

But interest-only loans seem conservative compared to the latest lending rage, the negative-amortization loan. Consumers who sign up don’t even have to pay the full interest owed the bank each month. Instead, they borrow more money as time goes by, making minimum payments in a way that echoes the world of revolving credit card debt. In a housing market that goes suddenly flat, such a loan guarantees the buyer will be “upside down” after a few years — meaning their home will be worth less than the mortgage on it.


If the market changes, and it always changes, a whole lot of people are going to be screwed with these loans.

1 comment:

Tyler said...

What I like about Ma-Zoura is that I can get a place thats 700 more sq feet for $100,000 less than Jessica paid--And purchase it in a trendy area in the city, instead of having to move to the burbs.

A friend of mine just bought a 950 sq ft condo in Old Town Alexandria, Virginia (he's a trendy metro-sexual) for $320,000. Och. His mortgage payment is going to be close to $2000/month. He said he'll be close to being "in the red" each month. Double Ouch.

Right now I'm looking at a couple lofts, one for $220,000 at 1527 sq ft. one a 1248 sq feet for only $188,000. Another friend of mine just bought a 2100 sq foot place with a huge back yard in a nice neighborhood just south of St. Louis for only $155,000! There mortgage is only $1000 per month and he and his fiance' split that, so its like cheap rent. I've been to that house, its cool and it would go for $578,000 in Amador County. Even more in So. Cal.

Can I convince anyone to move back to St. Louis with me? You'll only have to put up with 97-98% humidity in the summer and 6-13 degree temps in Dec. and Jan. But the plus side is you'll be able to live the American Dream.