# Are we headed for a mortgage default induced real estate crash? **URL:** \ **Category:** Great Debates\ **Created:** [December 3, 2006, 10:08pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740 "2006-12-03T22:08:36Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![lowbrass](https://avatars.discourse-cdn.com/v4/letter/l/dc4da7/32.png) [@lowbrass](https://boards.straightdope.com/u/lowbrass)\ **Post date:** [December 9, 2006, 8:56pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/41 "2006-12-09T20:56:08Z")
[QUOTE=hajario] One thing about the ARM’s that I don’t think has been mentioned is that the amount that they can go up in a year as well as how much it can go up total is typically capped no matter how much interest rates increase. People’s payments are not going to suddenly double. When I refinanced a year ago the ARM that they were offering me couldn’t go up more than two points in a given year or five points over the life of the loan. I, of course, got a fixed rate loan though. [/QUOTE] By “points”, do you mean percent? I thought “points” was the term used for an initial lump sum payment in exchange for a lower interest rate. If you’re talking about percent, then 2 percent a year would add up pretty quick. It’s my understanding that some of the more extreme types of loans can get hit with a pretty severe payment increase once the teaser rate runs out. ---
**Author:** ![hajario](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hajario/32/171_2.png) [@hajario](https://boards.straightdope.com/u/hajario)\ **Post date:** [December 9, 2006, 9:33pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/42 "2006-12-09T21:33:21Z")
[QUOTE=lowbrass] By “points”, do you mean percent? I thought “points” was the term used for an initial lump sum payment in exchange for a lower interest rate. If you’re talking about percent, then 2 percent a year would add up pretty quick. It’s my understanding that some of the more extreme types of loans can get hit with a pretty severe payment increase once the teaser rate runs out. [/QUOTE] “Point” means percentage points and can be used in either case. In the loan I was offered, the initial rate was around 5.5%. It could go to no more than 7.5% after one year and no more than 10.5% ever. ---
**Author:** ![lowbrass](https://avatars.discourse-cdn.com/v4/letter/l/dc4da7/32.png) [@lowbrass](https://boards.straightdope.com/u/lowbrass)\ **Post date:** [December 9, 2006, 9:54pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/43 "2006-12-09T21:54:42Z")
O.K. - my understanding is that while there are caps, they won’t save someone who overextended himself, especially once the market start falling. I believe in the early 90s in volatile markets, many people lost their homes. Someone correct me if I’m wrong, but I think that’s what happened. And if foreclosures are up as much as 557% in one area, it sounds like it might be happening again. ---
**Author:** ![Cisco](https://avatars.discourse-cdn.com/v4/letter/c/ccd318/32.png) [@Cisco](https://boards.straightdope.com/u/Cisco)\ **Post date:** [December 9, 2006, 10:49pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/44 "2006-12-09T22:49:25Z")
If 557% of the population defaults on their mortgage, we’re fucked. ---
**Author:** ![FRDE](https://avatars.discourse-cdn.com/v4/letter/f/e68b1a/32.png) [@FRDE](https://boards.straightdope.com/u/FRDE)\ **Post date:** [December 10, 2006, 11:00am UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/45 "2006-12-10T11:00:53Z")
[QUOTE=lowbrass] O.K. - my understanding is that while there are caps, they won’t save someone who overextended himself, especially once the market start falling. I believe in the early 90s in volatile markets, many people lost their homes. Someone correct me if I’m wrong, but I think that’s what happened. And if foreclosures are up as much as 557% in one area, it sounds like it might be happening again. [/QUOTE] The ‘vast increase’ might be from a very low base. The actual ‘value’ of property does not really matter, what is important is whether someone can afford the monthly repayments. Typically people taking out the maximum debt are fairly early in their careers, so increased pay from promotion and increased pay from inflation should wipe out the payment problem - and if someone has a fixed rate, then they’ll not notice anyway. What hurts is if they lose their jobs. Incidentally my ideal mortgage would be 30 year, fixed rate, interest only with an option of paying back capital at any time. ---
**Author:** ![Cisco](https://avatars.discourse-cdn.com/v4/letter/c/ccd318/32.png) [@Cisco](https://boards.straightdope.com/u/Cisco)\ **Post date:** [December 10, 2006, 3:35pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/46 "2006-12-10T15:35:01Z")
[QUOTE=FRDE] Incidentally my ideal mortgage would be 30 year, fixed rate, interest only with an option of paying back capital at any time. [/QUOTE] Those were very popular here back in '03 when interest rates were bottomed-out. All interest only features are considered an _option_, meaning you can pay the fully amoritized payment if you choose to do so. The only restriction would be if you have a pre-payment penalty but most of them are even pretty flexible as long as you don’t pay more than X principle\* in Y months. Their intention is more to keep you from refinancing before the lender makes a certain amount of profit, rather than to keep you from making double payments, etc. \*Must be what you call _capital_ in the UK. ---
**Author:** ![lowbrass](https://avatars.discourse-cdn.com/v4/letter/l/dc4da7/32.png) [@lowbrass](https://boards.straightdope.com/u/lowbrass)\ **Post date:** [December 14, 2006, 11:28pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/47 "2006-12-14T23:28:51Z")
[QUOTE=FRDE] The actual ‘value’ of property does not really matter, what is important is whether someone can afford the monthly repayments. [/quote] Right, and when the median home price is so far out of whack with the median income, such that less than 10% of people in these bubble markets can afford to buy a house, and people are extending themselves as far as possible just to make the introductory payments on an ARM or interest-only loan, and then the payments go _up_ substantially from there, these people are going to be in trouble. > [@](#): > > Typically people taking out the maximum debt are fairly early in their careers, so increased pay from promotion and increased pay from inflation should wipe out the payment problem - and if someone has a fixed rate, then they’ll not notice anyway. The fixed rate people are going to be o.k., it’s the very high percentage of ARMs that are going to be the problem. Unless everyone’s getting a 40% raise in the next couple of years, I don’t think that’s going to save them. ---
**Author:** ![lowbrass](https://avatars.discourse-cdn.com/v4/letter/l/dc4da7/32.png) [@lowbrass](https://boards.straightdope.com/u/lowbrass)\ **Post date:** [December 14, 2006, 11:31pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/48 "2006-12-14T23:31:47Z")
Here’s a very interesting chart. Hard to see how there’s going to be a soft landing after this: [http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon\_graph2.html](http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html) And an update: S.F. Bay Area prices were down (but not a lot) year-over-year for November. I’ll post as soon as the Los Angeles data is available. ---
**Author:** ![Spoke](https://avatars.discourse-cdn.com/v4/letter/s/a88e57/32.png) [@Spoke](https://boards.straightdope.com/u/Spoke)\ **Post date:** [December 15, 2006, 12:57am UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/49 "2006-12-15T00:57:08Z")
[QUOTE=lowbrass] Here’s a very interesting chart. Hard to see how there’s going to be a soft landing after this: > **[The New York Times \> Week in Review \> Image \> Graphic: A History of Home Values](https://archive.nytimes.com/www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html)** [/QUOTE] Wow. That _is_ a scary chart. Thanks for sharing that, lowbrass. ---
**Author:** ![FRDE](https://avatars.discourse-cdn.com/v4/letter/f/e68b1a/32.png) [@FRDE](https://boards.straightdope.com/u/FRDE)\ **Post date:** [December 15, 2006, 11:32am UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/50 "2006-12-15T11:32:51Z")
[QUOTE=lowbrass] Right, and when the median home price is so far out of whack with the median income, such that less than 10% of people in these bubble markets can afford to buy a house, and people are extending themselves as far as possible just to make the introductory payments on an ARM or interest-only loan, and then the payments go _up_ substantially from there, these people are going to be in trouble. [/QUOTE] It is not the median income that matters, it is the median income of people who want to buy a house (new entrants) and the median income of those that have bought a house fairly recently and stretched themselves **and** have a variable rate mortgage. I snipped out the 40% rise, but a lot of young people who have stretched themselves will definitely get a 40% raise in not that many years - they are young, job hopping and in line for promotion. I’m not saying that the market does not look a bit crazy, but what I am saying is that only a very few property owners will get kicked in the slats. In the early 1980s I worked for a package holiday company, we had a mega depression here in the UK, yet our business was booming. As one of the few Economists in the company, it was down to me to explain that, just because Joe next door is unemployed and hurting, does not mean that the rest of the street can’t lash out on two holidays per year. ---
**Author:** ![FRDE](https://avatars.discourse-cdn.com/v4/letter/f/e68b1a/32.png) [@FRDE](https://boards.straightdope.com/u/FRDE)\ **Post date:** [December 15, 2006, 11:42am UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/51 "2006-12-15T11:42:48Z")
[QUOTE=lowbrass] Here’s a very interesting chart. Hard to see how there’s going to be a soft landing after this: > **[The New York Times \> Week in Review \> Image \> Graphic: A History of Home Values](https://archive.nytimes.com/www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html)** And an update: S.F. Bay Area prices were down (but not a lot) year-over-year for November. I’ll post as soon as the Los Angeles data is available. [/QUOTE] Nice link, the graph is a bit misleading, the X axis is at 60, which is misleading to the average viewer. Also it should be plotted against real nett incomes per household. I suspect that would present a rather different picture, although I also suspect that it would show that people are spending a fair bit of their incremental wealth (from productivity and two people working) on housing. ---
**Author:** ![lowbrass](https://avatars.discourse-cdn.com/v4/letter/l/dc4da7/32.png) [@lowbrass](https://boards.straightdope.com/u/lowbrass)\ **Post date:** [December 16, 2006, 3:45am UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/52 "2006-12-16T03:45:03Z")
[QUOTE=FRDE] It is not the median income that matters, it is the median income of people who want to buy a house (new entrants) and the median income of those that have bought a house fairly recently and stretched themselves **and** have a variable rate mortgage. [/quote] I’m not sure what point you’re trying to make, friend. The _affordability index_ is a commonly-used bellweather for the state of the housing market. > [@](#): > > Affordability Index: > > A measure of the financial ability of U.S. families to buy a house. 100 means that families earning the national median income have just the amount of money needed to qualify for a mortgage on a median-priced home; higher than 100 means they have more than enough and lower than 100 means they have less than enough. There doesn’t have to be a 1 to 1 correllation between people who are currently looking for a house, and people whose income is included in the index. It’s a general comparison of how much people make compared with how much a house costs. It works because you can compare it over time; you can observe when the price of homes rises _much faster_ than the ability of people to _afford_ them. When the affordability index gets really low, and there are other factors that show a weak housing market, such as high inventory, low sales volume, increase in foreclosures, etc., then it’s possible there will be a downturn in the market. > [@](#): > > I snipped out the 40% rise, but a lot of young people who have stretched themselves will definitely get a 40% raise in not that many years - they are young, job hopping and in line for promotion. > > I’m not saying that the market does not look a bit crazy, but what I am saying is that only a very few property owners will get kicked in the slats. I have 2 problems with your argument. One, I see that you live in the U.K., so I’m not sure what your personal experience has to do with the U.S. housing market. Two, did people not get pay raises in the past? There have been significant downturns in the housing market in the past that followed smaller price run-ups than the current one. If “getting raises” defeats market downturns, why weren’t those market downturns defeated in the past? ---
**Author:** ![lowbrass](https://avatars.discourse-cdn.com/v4/letter/l/dc4da7/32.png) [@lowbrass](https://boards.straightdope.com/u/lowbrass)\ **Post date:** [December 16, 2006, 3:57am UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/53 "2006-12-16T03:57:43Z")
[QUOTE=FRDE] Nice link, the graph is a bit misleading, the X axis is at 60, which is misleading to the average viewer. [/quote] Why would that matter? The benchmark is 100, not zero. The graph shows precisely how far below 100 values have gone, and how far above 100. If the scale were not constant, then you’d have a good point as to it being misleading. But the scale _is_ constant. > [@](#): > > Also it should be plotted against real nett incomes per household. > > I suspect that would present a rather different picture I don’t see how. Incomes, adjusted for inflation, did not go up 90% from 1996 to 2006. Didn’t they in fact go down? ---
**Author:** ![FRDE](https://avatars.discourse-cdn.com/v4/letter/f/e68b1a/32.png) [@FRDE](https://boards.straightdope.com/u/FRDE)\ **Post date:** [December 16, 2006, 11:52am UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/54 "2006-12-16T11:52:32Z")
The UK and the US are pretty similar in terms of property prices, although the UK is a bit more extreme due to our zoning laws. Keeping things really simple, a person who bought a house 10 years ago could not **materially** give a toss about property prices, well let’s just say it is a Second Life experience for him. The vast majority of people do not want to buy houses, they don’t want to sell houses and their mortgage has been inflated (and wage degraded) to the point that it is just an irritant. House prices are the foam on the wave, and I’m not entirely sure that the ‘wave’ is not a ripple. Some people get hurt badly, but 95% are materially unaffected, although their altered Second Life fantasies change their outlook and behaviour. ---
**Author:** ![Spoke](https://avatars.discourse-cdn.com/v4/letter/s/a88e57/32.png) [@Spoke](https://boards.straightdope.com/u/Spoke)\ **Post date:** [December 16, 2006, 3:33pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/55 "2006-12-16T15:33:16Z")
[QUOTE=FRDE] Keeping things really simple, a person who bought a house 10 years ago could not **materially** give a toss about property prices, well let’s just say it is a Second Life experience for him. [/QUOTE] Not true in the US. Many people in the past ten years have taken advantage of low mortgage rates to borrow against equity. That equity is vanishing, leaving some number of homeowners “upside down” (_i.e_., owing more on their homes than the home is now worth). So now, a homeowner in that position may not be able to trade his ARM for a fixed mortgage, since the home has lost value. Or, even if the homeowner was smart enough to get a fixed rate, he is stuck with the house. Can’t sell it without paying the difference between the selling price and the loan amount. And what if the person gets transferred and _has_ to sell? ---
**Author:** ![hajario](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hajario/32/171_2.png) [@hajario](https://boards.straightdope.com/u/hajario)\ **Post date:** [December 16, 2006, 3:57pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/56 "2006-12-16T15:57:01Z")
[QUOTE=spoke-] Not true in the US. Many people in the past ten years have taken advantage of low mortgage rates to borrow against equity. That equity is vanishing, leaving some number of homeowners “upside down” (_i.e_., owing more on their homes than the home is now worth). So now, a homeowner in that position may not be able to trade his ARM for a fixed mortgage, since the home has lost value. Or, even if the homeowner was smart enough to get a fixed rate, he is stuck with the house. Can’t sell it without paying the difference between the selling price and the loan amount. [/quote] What percentage of homeowners bought their homes in the last say two years? They are the only ones in any serious danger of getting caught upside down. > [@](#): > > And what if the person gets transferred and _has_ to sell? Or laid off. This is what happened the last time which was in the 1989-92 time frame. That is one of the biggest differences between now and then. Back then unemployment was rising quickly and there was a recession. Locally this was largely due to a huge decrease in Defense Industry jobs. **FDRE** is right. My house is worth four times what I paid for it. It could drop 30% and I wouldn’t give a shit because I know that it will still be worth way more than it is today when it’s time for me to sell which won’t be for thirty years. Of my fifteen or twenty immediate neighbors, only one would lose money if a crash happened and he sold one year from today and he’s a young guy who’s not moving any time soon. ---
**Author:** ![Metacom](https://avatars.discourse-cdn.com/v4/letter/m/ecae2f/32.png) [@Metacom](https://boards.straightdope.com/u/Metacom)\ **Post date:** [December 16, 2006, 4:12pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/57 "2006-12-16T16:12:35Z")
[QUOTE=hajario] What percentage of homeowners bought their homes in the last say two years? They are the only ones in any serious danger of getting caught upside down. [/QUOTE] Bought their homes _or_ did a cash-out refinance. There’s been a lot of mortgage equity withdrawal over the last several years… ---
**Author:** ![lowbrass](https://avatars.discourse-cdn.com/v4/letter/l/dc4da7/32.png) [@lowbrass](https://boards.straightdope.com/u/lowbrass)\ **Post date:** [December 16, 2006, 9:39pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/58 "2006-12-16T21:39:59Z")
[QUOTE=hajario] That is one of the biggest differences between now and then. Back then unemployment was rising quickly and there was a recession. Locally this was largely due to a huge decrease in Defense Industry jobs. [/QUOTE] Time will tell. I’ll just point out to you that there is _always_ an abundance of people saying “this time it’s different” right before every crash. People were saying “this time it’s different” before the Nasdaq blew up. It wasn’t different; it was the same old story, a cycle that continues to repeat itself. And the people who say “this time it’s different” generally seem to be the same people who have a vested interest in _not_ having a market downturn - either realtors, homeowners, or investors. And I think the point about foreclosures is a little misunderstood. We don’t have to have the _majority_ of homeowners go into foreclosure in order for it to affect prices. Lots of people kept their houses in 1989, but there were enough who got into trouble that it caused a crash. They didn’t _all_ get into trouble, just some. ---
**Author:** ![lowbrass](https://avatars.discourse-cdn.com/v4/letter/l/dc4da7/32.png) [@lowbrass](https://boards.straightdope.com/u/lowbrass)\ **Post date:** [December 16, 2006, 9:52pm UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/59 "2006-12-16T21:52:29Z")
November data is in. Los Angeles County still squeaked by with a 2.6% price increase. Volume is down 18.9% though. San Diego prices dropped 6.9%, ouch. Orange County is flat. ---
**Author:** ![hajario](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hajario/32/171_2.png) [@hajario](https://boards.straightdope.com/u/hajario)\ **Post date:** [December 17, 2006, 1:43am UTC](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740/60 "2006-12-17T01:43:38Z")
[QUOTE=Metacom] Bought their homes _or_ did a cash-out refinance. There’s been a lot of mortgage equity withdrawal over the last several years… [/QUOTE] That too. Good point. > [@lowbrass](#): > > Time will tell. I’ll just point out to you that there is always an abundance of people saying “this time it’s different” right before every crash. People were saying “this time it’s different” before the Nasdaq blew up. It wasn’t different; it was the same old story, a cycle that continues to repeat itself. This time it _is_ different. That doesn’t mean that this different set of conditions won’t cause prices to decrease as well. Speculators will get hurt, people who stretched too far will get hurt, long term investors will do very well. > [@](#): > > November data is in. Los Angeles County still squeaked by with a 2.6% price increase. Volume is down 18.9% though. San Diego prices dropped 6.9%, ouch. Orange County is flat. Can you link to where you are getting that data please? I am interested in my area. [Previous page](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740.md?page=2) [Next page](https://boards.straightdope.com/t/are-we-headed-for-a-mortgage-default-induced-real-estate-crash/382740.md?page=4)