I agree that it could never happen quickly - the shock would be too much. The only possible way it would pass is if it were phased in over a long period - say, 20 years.
But even that’s unlikely. Everyone can see how this deduction lowers their effective costs per $100k of mortgage; few can see how it makes everyone willing to pay more for a house, thus making everyone’s mortgage a bit bigger.
I THINK that a “reverse amortization” is just the name for what happens when you get a “option arm”.
In an “option arm”, you haven an interest only loan, and the rate is fixed for a period of time. But you have the OPTION of paying less than the interest payment. They tack the unpaid interest onto the principal you still owe. If you keep doing this, the principal you owe increases. . .and voila, reverse amortization.
Also remember, mortgage lending got so lenient that places have allowed “stated income” loans. That is what it sounds like. You just state your income to see what you qualify for. Google it if that sounds like the ravings of a lunatic.
All of this together has created a situation where a lot of people are in houses they can’t really afford.
How much? I don’t know. Maybe it’s a blip in the national picture. Maybe it’s a huge chunk of it. I don’t know many people personally who have these crazy loans but they’re out there.
I got my loan based solely on my equity. They didn’t even look at my income.
In my case it was a reasonable thing to do for a lot of reasons that I won’t bore you with but anyone with enough equity in their home could get one of these.
Many people seem to think that there is major fraud being committed here: Namely, loan officers insutrct applicantes to falsly state income, fraudulently declare properties as “primary residence”, and other ways in order to qualify them for bigger and bigger mortgages. These are then securitiezed and sold on the market as mortgage backed securities to investors. The person writing the loans, being paid a commision on the face value, has no incentive to do realistic background/income checks, etc because they can pass on all the risk to investors on the open market, many of whom will be Chinese or Middle Eastern Oil Sheiks, but who’s to say no pension funds will be affected? The people writing these mortgages are literally fooling all the people all the time. The combination of all this fraud and stupidity will be evident when the asset bubble does burst.
That’s one way to look at it, anyway.
Don’t worry about real estate prices, when I was born my dad was 48 years old as I was growing up I would hear him say don’t buy that real estate is cost too much. I didn’t listen to much in the beginning but as I got older I realized something that no matter what anyone paid for their real estate it always went up. So to worry about if you’re going to make money on real estate is pretty much all relative. The fact is are you going to make a lot of money in a short period of time, or where you have to wait for the market ketchup. If you look at history you can see that it it has a system of appreciating. So if you can stand the payment the advantages will always outlive the disadvantages. One last note I will have to say though this is the first time I’ve seen real estate lose
I am from the UK and have seen two major property booms and busts.
The big problem is when you borrow on a variable rate mortgage and interest rates soar.
At that point monthly repayments represent such a proportion of some peoples’ nett income that eating in (not eating out) becomes a financial problem.
However, in the majority of areas only a few properties really change hands, so provided the monthly repayment is manageable the ‘value’ of the property is not material.
What happens is that a few people hit the three Ds (Death, Divorce, Disease) and they have to sell - regardless of price (actually add Redundancy and Unemployment to that).
In the original poster’s case, I agree with the ‘price of tea in China’ approach.
The ‘interest only’ mortgages are actually not so daft, conventional repayment mortgages are pretty similar, and always have been. With a fixed monthly repayment (even if the interest rate is flexible) it is pretty easy to see that in year 30 one is really repaying 95% capital. It does make sense paying off the capital faster if one can, but it is not particularly important as one should be able to find a savings ‘vehicle’ that allows one to slap down the last repayment.
In the UK Interest used to be tax deductable, but that was phased out during the 1980s, and very sensibly so. You cannot do it quickly because it would crunch the market, but the way we did it was to restrict it to the average house price and then to the lowest tax band, finally abolishing the whole thing.
The subject is close to my mind as today I have had a stream of people looking at my rather interesting appartment (which is like its owner, slightly tatty, but basically very good stuff - a snip at $470,000 ).
To the OP - don’t worry, but watch out for interest rates.
…and this kind of nonsense is another reason for the bubble.
I’m not sure why saying that holding on to your house for the long term is the best way to guarantee a return is considered nonsense. Long term holders are not the cause of the bubble.
I was referring to the part about real estate always going up.