Thursday, June 16, 2005

Economy: Pin, Meet Housing Bubble

[via Brad Delong]
The Trillion-Dollar Bet

[NY Times] American homeowners have made a trillion-dollar bet that mortgage rates will remain near record lows for at least a few more years. But with some interest rates already rising, economists worry that the bet could turn bad.

The problem is that new types of mortgages that hold down monthly payments for families - helping many buy homes that they would not otherwise be able to afford - also require potentially far higher payments in future years.

The bill will soon start to come due in a serious way, as the initial period of fixed payments, typically set at artificially low rates, expires for millions of homeowners with adjustable-rate mortgages. This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted. But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.

What is fascinating to me, is that all these people were getting mortgages during a period of historic low rates. Therefore, obviously, an adjustable rate had no where to go but up. Now, I'm no financial genius (just ask my wife) but we bought our first house in 2001 and refinaced in 2003. At no point in those transactions did I ever consider anything but 30-year fixed mortgages even though the payments (at 5.375%) are fairly tight for us.

You'd have to be freaking crazy or expecting a windfall of new income in the future to have done otherwise. Somehow I don't see all these people having jumped up the corporate ladder in five years to handle a doubling of their mortgage payments.

On the plus side, this will be a damper on the Republicans chances of running on the economy in 2008.

1 comment:

Anonymous said...

I agree with you, when i bought my house in Dec 2002, it didn't make sense for me not to lock in a 5% rate for 30 years. the thought process that will get most people screwed is...." I will only live in this house for 3 - 5 years. So let's keep this payments low, then I can sell and take out all that equity" which could be significant if they sell soon. most people didn't realize that whatever they would want to move into has gone up just as much (if not more) then the house they are in, so they end up staying in the house they can no longer afford.

Oh well, it's not like this didn't happen 20 years ago. i mean they always said history repeats itself, i just didnt think i would see it so many times