As risky home loans rise, house-price 'bubble' inflates

[deadparrot]

As any savvy Realtor can argue, surging prices by themselves might not prove the existence of a housing bubble. In communities that are growing rapidly, demand for housing exceeds supply. Prices naturally rise.

Nevertheless, one sure sign of bubble trouble is the irrationally exuberant lending industry. Almost one third of all new home loans made in July, August and September included an introductory period in which the borrower could choose to pay only the interest and no principal.

These interest-only loans, which generally come with a very attractive interest rate for a period of a few years or so before reverting to more conventional terms, may be appropriate in some cases. They make sense for people who anticipate selling in the near future and who are willing to gamble that prices stay high and interest rates low.

But the scale on which they are being offered shows that many buyers are being lured into inappropriate loans.

http://news.yahoo.com/s/usatoday/asriskyhomeloansrisehousepricebubbleinflates

[GrumpyGreg]

1. I can't imagine anyone with one grain of common sense

taking out an interest only loan.

[gratuitous]

2. Well, if you're speculating

Then an interest-only loan makes a certain amount of sense. You're just churning properties, taking the quick profit from a less-than-one-year holding of the property. You don't care about reducing your principal obligation on the loan.

Of course, if you're a home buyer, looking for a residence, this kind of speculation increases your cost to buy a place to live and really hurts your pocketbook, but what do the lenders, title companies, inspectors, and other ancillary industries care? They're all making money. Right up until the second the floor of the housing market drops. Then they run to their pals in Congress for protection against the backlash from the market forces they themselves unleashed.

[redacted]

11. The IO payment option makes sense for some. Let's say you are a resident

in a medical program and in a few years your income will increase greatly, but you'd like to buy a house now.

Or you are in a profession that makes alot of money during peak seasons but income is sparse in off-times -- the IO payment option can help you budget -- and you pay the maximum amount plus when income is higher.

Those loans make sense for people like that.

But you need to be disciplined and you need to know what you are getting into or you can get into big trouble.

Something I am not sure everyone understands.

[progressivebydesign]

12. They make perfect sense for the right situation and people.

If you are buying a house that you know you will be selling in a few years. If you have a good amount of equity going in, and have found a house at below market value (meaning that this is a good investment). Many people just jump on the most negative aspect of a subject, without knowing the entire story. IO loans work for some people... especially if you KNOW that you will be financing another home within say.. 4 or 5 years... anyway. Makes no sense to pay higher payments on a long term loan when you are selling within a short time period.. and having run the amortization of both types of loans, the amount of principal you pay in four or five years is negligable. It's a good loan for people who are using it NOT as a way to afford a home they could not otherwise afford. It's a proper tool, just as home equity loans can be, and even credit cards, it's not a blanket bad thing. Believe me.... I researched this stuff for months.

[MasonJar]

3. Actually the amount of principal paid on a thirty year loan is

miniscule for the first ten years. The whole thing is a racket.

[redqueen]

4. A racket you say?

I'm shocked, SHOCKED to hear this!

:sarcasm:

[DFWdem]

7. It's not a racket, it's math

That's how interest works. The longer you take to repay money you borrow, the more you end up paying in interest.

[redqueen]

9. The racket part is them duping people

into thinking they're getting a deal.

Caveat emptor, though, right?

*sigh*

[DFWdem]

6. You are correct

An interest-only loan might reduce your mortgage payment by $50-$100 a month at most. It's not like you can cut your payment from $1,500 a month to $800 a month on an interest only loan because roughly 90% of your payment is interest in the early years of a loan. The really risky loans are negative amortization mortgages, where you actually pay less than the amount of interest you owe, and no principal, with the additional money owed getting tacked on to the principal balance to be paid at a later date.

[shantipriya]

5. housing bubble

The day China and Japan stop funding our luxurious lifestyles, we are going to be in some serious dilemma!

[cliss]

8. I was talking to my brother in law last week,

he has a friend in the mortgage banking business. The friend had told him that there are thousands of "interest-only" loans which will come due in 2006. At the bank, they are speculating that most of these will default.

So why the hell did they offer these loans? Why did the homeowners take them? The job market is still tight here in the Portland area. Every single cost imaginable has gone up.....except wages.

I understand that banks don't want houses. They want to make money on loans. But it looks like they're going to get them anyway.:smoke:

[davsand]

10. Sounds like 2006 is gonna be the year for buyers.

If they default and the banks get stuck with them look for the prices to bottom out. You TOO can own a McMansion if you can convince somebody to give you the cash to buy it!

Sure is gonna suck to be a seller, lender or an appraiser in 2006, however.



Laura

[progressivebydesign]

13. Home sales are rebounding as we speak.

The dip in Consumer Confidence (the TRUE measure of the economy) was due to the outrageous gas prices, the fear of the home heating prices, and the emotional after affect of Katrina. People are feeling better again, even if it's not warranted, and homes are moving again. I hope the price craziness in some areas adjusts a bit... but I can't exacly feel the glee that some people here on DU feel when they think that people will lose their homes. I thought the republicans were the mean ones?

[davsand]

14. I take no joy in anyone facing the loss of a home.

By the same token, I deal with property tax issues every day, along with valuation of real estate. I can't TELL you the number of taxpayers that come thru my office that say they didn't realize what the taxes were gonna be when they bought or built the house. That is either very poor financial planning or else BAD advice. Neither of those are happy things, but they are avoidable.

Foreclosures are a very bad thing for the consumers, but they are equally bad news for the economy.



Laura