Saturday, May 28, 2005

THE GREAT REAL ESTATE MARKET COLLAPSE

Housing Prices going up ? Not for long . Not living in a real estate ' bubble' ..think again. Prices across the nation are going up 15-25 % a yr and that is considered 'normal'. A crash bigger than anyone can imagine is right around the corner and I will explain why .
In the last few years particularly after 2001 , alot of people have bought homes using adjustable rate mortgages ( ARMs) . Can't afford that dream home , no problem. Just get that ARM interest only mortgage and your monthly payments will be 25-50 % less than what you would be paying with a fixed mortgage amortized over 30 years. These days we have ARMs starting as low as 1% . The problem lies in the fact alot of people are using these ARMs not to free up additional income to use for other purposes but rather to make up for the fact they cannot afford that home on a fixed rate fully amortized loan . In expensive markets - think California , people on incomes of $50,000 a year are buying $500,000 homes. Using ARM options their monthly payments are affordable initially but things change down the road. Most ARMs are fixed from a few months up to 10 years with most being of the variety that are fixed for 3 years . ARMs are generally tied to an index - T-Bill, Libor etc. If anyone has tracked these indexes,they would notice the rapid uptrend in the last few years with rising rates. By the time the fixed period for these ARMs are over, the rate these home owners will be paying will be ridiculously high , think 8-9 % and to top it off it will be fully amortized ( interest and principle payments) . Those people making mortgage payments of $2000-2500 a month will be paying close to twice that $4000-4500 a month . Now we raise the question , if people could barely afford the homes with ARMs, how will they ever afford the payments at the higher rate ? In California according to studies conducted by the mortgage industry , close to 70% of new home buyers have used ARMs to purchase their homes over the last 3 years. Many of these ARMs are just starting to reach the adjustable period where they will be tied to the higher index . Many of these homeowners do not have the option of refinancing to a fixed rate mortgage because they would not financially qualify for them . The only option for a lot of these people will be to sell the house or go into foreclosure . The number of homes on the market for sale will rapidly increase through out 2005 and 2006 causing real estate prices to plummet especially in areas like California where the affordability is so limited.

1 comment:

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