Are Mormons betting the farm?

[Robin]

In the NYT:

http://www.nytimes.com/2006/07/23/business/23mortgage.html?ei=5094&en=48d3badc80108762&hp=&ex=1153627200&adxnnl=1&partner=homepage&adxnnlx=1153597038-vECwJP2axkP+M5/ZJfmmzg

Sure, this is a CA thing, but the swath of risky financing also cuts right through Mormon country.

In SLC, 58% (higher than in SanFran, Oakland and Los Angeles) of homeowners are refinancing with exotic adjustable-rate mortgages where the loan balance actually GROWS.

This housing madness can't last forever, and then what?

[El Guapo]

In the NYT:

http://www.nytimes.com/2006/07/23/business/23mortgage.html?ei=5094&en=48d3badc80108762&hp=&ex=1153627200&adxnnl=1&partner=homepage&adxnnlx=1153597038-vECwJP2axkP+M5/ZJfmmzg

Sure, this is a CA thing, but the swath of risky financing also cuts right through Mormon country.

In SLC, 58% (higher than in SanFran, Oakland and Los Angeles) of homeowners are refinancing with exotic adjustable-rate mortgages where the loan balance actually GROWS.

This housing madness can't last forever, and then what?

Man, taking out an ARM today is crazy- especially since huge inflation may be just around the corner. Lock in your rates, people.

[DirtyHippieUTE]

I took out an ARM last year. The rate is locked for 5 years. We'll be moving in 3.

[Surfah]

I took out an ARM last year. The rate is locked for 5 years. We'll be moving in 3.

An ARM like that is perfect. If you know you will be relocating that's the way to go.

[Robin]

I took out an ARM last year. The rate is locked for 5 years. We'll be moving in 3.

I guess the risk in this situation is that if the economy in general hits a serious general speed bump, and this drives home prices down and interest rates up, you don't have the option of 'riding out the storm' along with people that have a long term fixed rate. And to complicate things a bit more, if the market looks like it is even heading that way, we could get a glut of houses on the market all at once, from people in your situation, and that could also drive prices down.

I certainly don't look forward to economic disaster for this country, but as the kind of fool who didn't crunch the numbers in the first place, who was an ignorant first-time home buyer, we have a 30-year fixed in a home that we are definitely going to sell LONG before 30 years are up (it was only a $75k loan, so the cost of our error isn't too deadly), we will be in a good position to pick up a 2nd home for cheap if the market ever goes belly up.

[Jeff Lebowski]

I guess the risk in this situation is that if the economy in general hits a serious general speed bump, and this drives home prices down and interest rates up, you don't have the option of 'riding out the storm' along with people that have a long term fixed rate. And to complicate things a bit more, if the market looks like it is even heading that way, we could get a glut of houses on the market all at once, from people in your situation, and that could also drive prices down.

I certainly don't look forward to economic disaster for this country, but as the kind of fool who didn't crunch the numbers in the first place, who was an ignorant first-time home buyer, we have a 30-year fixed in a home that we are definitely going to sell LONG before 30 years are up (it was only a $75k loan, so the cost of our error isn't too deadly), we will be in a good position to pick up a 2nd home for cheap if the market ever goes belly up.

It's like the old saying: "You don't know who is swimming naked until the tide goes out." I am guessing that there will be some real bargains on mansions in Utah in the next couple of years.

[DirtyHippieUTE]

I guess the risk in this situation is that if the economy in general hits a serious general speed bump, and this drives home prices down and interest rates up, you don't have the option of 'riding out the storm' along with people that have a long term fixed rate. And to complicate things a bit more, if the market looks like it is even heading that way, we could get a glut of houses on the market all at once, from people in your situation, and that could also drive prices down.

I certainly don't look forward to economic disaster for this country, but as the kind of fool who didn't crunch the numbers in the first place, who was an ignorant first-time home buyer, we have a 30-year fixed in a home that we are definitely going to sell LONG before 30 years are up (it was only a $75k loan, so the cost of our error isn't too deadly), we will be in a good position to pick up a 2nd home for cheap if the market ever goes belly up.

We couldn't ride out the market even if we wanted to. We are only here for three years. Buying a house on a 3 year plan isn't the most risky investment but we know there is some risk involved.

The way I see it... Living somewhere costs money. I can pay rent for the 3 years or interest on a mortgage for three years. The way I've done the math the interest comes out cheaper and I get to deduct it from my taxes.

Ergo... Even if I only break even on the house it was still cheaper than renting.

Even if we take a hit when we sell the house, the hit would have to be fairly substantial to overcome the benefit of having the home vs. renting.

[Robin]

We couldn't ride out the market even if we wanted to. We are only here for three years. Buying a house on a 3 year plan isn't the most risky investment but we know there is some risk involved.

The way I see it... Living somewhere costs money. I can pay rent for the 3 years or interest on a mortgage for three years. The way I've done the math the interest comes out cheaper and I get to deduct it from my taxes.

Ergo... Even if I only break even on the house it was still cheaper than renting.

Even if we take a hit when we sell the house, the hit would have to be fairly substantial to overcome the benefit of having the home vs. renting.

Isn't an ARM, particularly one with NEGATIVE AMORTIZATION, essentially a pyramid scheme? If everybody believes that historicly low interest rates will eventually rise, and if each ARM purchaser bases his plan on the expectation that a new person will come in and buy his debt away from him (hopefully signing up for more debt than the previous buyer) then the whole thing smacks of a pyramid scheme, with each level of borrowers depending on the gullibility of some future set of borrowers.

Someone is going to get left holding the card, no?

[MikeWaters]

for the housing market to crash, there must be a surplus of housing. That's the issue: it's still a tight market.

[DirtyHippieUTE]

There is one big thing you're missing. This isn't just debt passing hands. The loan is based on the value of some real property. Investors are "betting" that the real property will increase in value. The only way somebody could get left "holding the bag" is if they buy the property for more than it is worth.

Other ARM loans require that you pay off the interest (at a minimum). The idea "should" work on two levels. 1- Real property values usually increase. 2- The future value of the $$ you borrow will decrease.

I wouldn't go for an ARM loan if I planned to stay in the house longer than 3 years.

[Robin]

for the housing market to crash, there must be a surplus of housing. That's the issue: it's still a tight market.

My understanding is that a lot of the real estate being bought and sold in the West is speculative investment. Sure they will rent it out to someone, but the rent won't cover the cost of the mortgage. If these are second homes and rental homes, does that not suggest a bit less tight of a market than it would otherwise appear?

But I guess there is a really tight rental market too... at least there is in Los Angeles.

Perhaps we are witnessing an historic division of land ownership that will come to redefine 'the American Dream,' putting home ownership permanently out of reach of a vast majority of working class people, like it is in many other countries.

[MikeWaters]

no, you will witness migrations of people to areas with cheaper housing.

I'm not sure, but I believe house ownership now is the highest it has ever been.

[Robin]

no, you will witness migrations of people to areas with cheaper housing.

I'm not sure, but I believe house ownership now is the highest it has ever been.

A couple of points...

Sure, home ownership might be high right now, but what does that mean if the ratio of mortgage debt : personal income and the percent of risky loan packages is also extremely high?

"Ownership" has a fairly specialized meaning when you are paying interest only on a loan that actually GROWS over time.

And as for urban sprawl, that seems to be a different house of cards. Sprawl can only stretch as far as there are real jobs. It ultimately has to tap into some kind of real industry (ie. not service jobs like medicine and lawyering) to bring fresh money into the local economy.