Supposedly, the real estate in Tokyo, Japan exceeded the value of the total United States land mass. That’s a hell of a bubble. Prices in the US have quite a bit to drop yet. One 50 year veteran of the real estate market said he has never seen a “soft landing”, at least not so far.
It sounds counterintuitive, but you can still profit if your house goes down in value. As long as the decrease is less than the amount you’d pay in rent, you’re saving money.
That’s one way to look at it. But you could also look at the guy who continued to rent when prices were high, then bought when they dropped - he’s a lot better off.
To the OP: First off, the only reason you should worry is if you expect won’t be able to make the fully amortized payment that will begin to come due after year 5. The actual price of your house is academic unless you have to sell.
That being said, I want to address several comments here:
- Renting vs Buying (in CA specifically) - despite the hype, at the peak real estate prices, renting vs buying calculations showed that you were paying quite a bit more to buy (as much as twice as much for just Interest-Taxes-Insurance, minus the tax break - adding in paying off equity makes buying even more expensive, but isn’t apples-to-apples) than you would be to rent the same house. This shows that the prices are likely too high vs rents to be sustainable long term and either rents must come up (which implies big wage inflation - people don’t get a loan for rent, so they have to be able to pay it out of wages right now), or housing prices must come down in CA drastically - but that doesn’t mean it has to happen TODAY.
There are several good blogs to educate yourself about the subject:
http://thehousingbubbleblog.com
http://www.rgemonitor.com/blog/roubini/
- This housing bubble is larger than previous ones in the lifetimes of those currently alive, and is different for people in CA and FL specifically than those before, because of the number of Adjustable rate loans - In CA specifically in 2006 a large majority of buyers took out ARMs, which are fine if the buyer could pay the fully amortized amount when the Adjustable rate period is over. But if they can’t (not enough wage inflation, too much of a payment jump after the Adjustable period) then the resulting foreclosures could help drive the market down further.
I read (in an article linked from one of the housing blogs, no cite right now) that 82% of house purchases in California this year was been through Interest Only/Negative Amortization mortgages. :eek:
I got some relatives in Irvine, maybe next year I’ll head down there for a visit and offer him $100k for his house and $15k for his BMW. 
82% sounds way too high… but I might believe 40%.
I thought the same thing but then I saw that he said 82% this year which makes it more believable. It still seems high to me too though.
I can’t speak to the 82% number itself, but it wouldn’t be inconsistent with the trends I’ve been seeing in the past couple of years. For example, this article quotes numbers of 47% of all new California mortgages being interest-only in 2004, and 61% in the first two months of 2005. For reference, in 2002, only 2% of new mortage loans were interest-only.
The thing that sucks about this is that people who made sound buying decisions, stuck with fixed-rate mortages, improved their properties wisely, etc. are going to be screwed over by house-flipping carpetbaggers, idiots who fell for interest-only mortgage scams, and panic-sellers. I don’t mind paying my money and taking my chances, but I despise having all these other twits pissing my investment away.
Although I might end up taking advantage of some poor schlub who desparately needs to get out from under their poor decision for a fire-sale price.
I haven’t heard of the “interest only” scam. Can you enlighten me as to what that means?
It means you pay only the interest on the loan for the first five years, after which you start paying off the principal and have a much higher payment. I also believe the vast majority of interest-only loans are also adjustable-rate mortgages, so if the interest rate increases, your payment after five years can go up substantially.
They’re perfect loans for people who only plan to own for a short period of time and expect a substantial increase in the home price over that time. Unfortunately, a lot of people have used them to buy houses they couldn’t otherwise afford, and thus may find themselves in trouble when the interest-only period ends, especially if interest rates increase.
To flesh out a piece of Giraffe’s excellent post a bit it means you are flat out betting that the value of the home will increase before you have to/want to sell. Equity with a more traditional loan gives you some protection in a market correction. With Interest Only, when the house price falls, you end up owing more* on your mortgage than your home is worth.
If you panic sell (or more likely can’t afford the new payments), the proceeds of a sale won’t cover your loan balance.
*
theoretically you could have put 10% down and 5 yrs later the house has only lost say 6% of its value so your sale does cover the the mortgage even if you still lose money
By some, perhaps. Not by me. I’ll consider it a good place to buy when the interest alone on a loan doesn’t exceed my rent payment by a factor of 2. I’m just not willing to take the risk that I’d have to take to buy a house here (even a small one). I’d be putting all my investment eggs in one basket.
The claim that this housing crash might not be bad because unemployment is so low, so people aren’t forced to sell is incomplete. People used to have a down payment that provided at least some equity in their homes, and fixed mortgages that they could continue to pay if they had a job. Because of the increasing numbers of exotic mortgages, people will be forced to sell even if they keep their jobs, simply because the payments will outgrow their salaries.
I agree with you for the most part. Most of the time people do have some kind of down along with the exotic mortgage though.
I knew more than a few people who bought at the last peak when prices dropped around 20%. A few of them had to sell and then give extra money to the bank to pay off their mortgage. Don’t forget the 5-6% fee that the seller pays to the realtor.
I had to refinance my place a little over a year ago to buy out my ex-wife. I got a 30 year fixed but you should have seen some of the ridiculous mortgage products that I was offered. I forget exactly how it worked but there was something called a reverse amortization where the principle of the loan could increase over time.
The point about exotic mortgages isn’t about what happens to people when they get repo’d, by and large nothing will happen and no one cares. You can’t hunt down your debtors and break their legs nowadays. The point is that current lending practices are driving up asset prices by giving stupid people easily available money, no different than your run-of-the-mill bubble.
It’s true. I also think the fact that the five-year interest-only period is going to end at the same time for a lot of people is going to drive down house prices at lot more sharply than if people were in traditional ARMs and just gradually found themselves unable to afford the mortgage as interest rates increase. It’s bad enough to let people buy stuff they can’t afford, but setting them up to all potentially go boom at the same is just crazy.
Quite right. This tends to increase the price runup at the peak of the bubble, and thus the amount that prices fall (crash?) when the bubble bursts.
IMO, it should not be easy to buy more than one house. If people with serious cash on hand want to speculate, it’s hard to stop them. But they, by definition, can afford to lose that money. Allowing (indeed, encouraging) speculation “on margin” is nuts.
Indeed, I’d go so far as to question making mortgage interest deductible. This is widely cried up as a way of helping ordinary folk make the step to owning a home. But if this deduction weren’t available, the money available for buying homes would be less, so prices would be lower. The result would be that the financial challenge to buying a house would be not so different.
Though I agree that interest only loans are the work of the devil, I suspect the adjustable feature is more dangerous than the no equity payment feature. You don’t pay a bunch of equity in the first few years in any case. I left Louisiana in 1980 just before the oil crash. I sold my house at a small profit (though I had to finance the buyer at the discount mortgage rate of 12.5% 
) but lots of my colleagues walked away from their traditional mortgages when the price of their houses fell below their down payment.
In California there is one additional reason people don’t move, which has increased housing values. If you have been in a house for a long time, even if you move to a cheaper house (for instance if the kids have left) you will wind up paying a lot more in property taxes, thanks to Prop. 13. My neighborhood is full of retired people in houses too big for them, paying practically nothing in property taxes. A few move, but a lot stay until they get carried out.
There was a lot more mobility in New Jersey.
I agree that is where much more of of the danger lies in this device for most people in most situations. I felt** Giraffe** did a good job there and I wanted to mechanic this device out for him a bit more, pointing out that in a declining market it is not a jood idea (esp. for a guy apparently safely in a home who is sweating a correction -which is natural for anyone)
**
iamthewalrus **makes the larger point who these ARMS, No Interest and others on this thread which others have too: Because of the increasing numbers of exotic mortgages, people will be forced to sell even if they keep their jobs, simply because the payments will outgrow their salarie and that may fuel the correction further
Actually, if one of the home owners is over 62.5 years old, they can move to a smaller house without an increase in their property taxes. This was not one of the original provisions of Prop. 13 but was changed by voter initiative over fifteen years ago.
It’s too late for that. To make that change now would drive down the prices of homes even further. It’s been proposed but would never, ever pass through Congress. As you say, the effect would be the same in the end but those who own homes now would be massively screwed and for no good reason.
You probably knew this but it should be noted that mortgage interest is only deductible for your primary residence. You do not get this deduction for vacation homes, rental property or spec houses.