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Affordability challenged. - Portrait of a Young Man as The Artist — LiveJournal
Affordability challenged.
It would seem that my predictions about the housing market is relatively true. The first round of variable interest rate loans are changing this year with another trillion (that is nine zeros) dollars in loans coming up to change in the next year. This means that people are frantically searching for the next great deal; sadly, at the same time, the market is cooling because prices are too high. No one can get into the market without a variable interest loan, many even have to get variable, interest only loans.

For those that don't know these terms, here's a quick primer.
(apologies of I'm off on this. I'm still learning but this is what I've pieced together in my research)

Variable interest rate loans - these loans start with a very low interest rate which makes for far smaller mortgage payments for the first few years. After a set term, usually multiples of five years, the rate increases and you pay more money for the remainder of the loan life. TH jumps are usually 2 two three percentage points which may not sound like much but when you think about the cost of a home, the amount is pretty large - especially over time.

On its own and with a longer loan term this could be less a problem that it seems to be. In fact, it's a good way to break into the market if you plan for it. They do work best when I market slows, with overall property value lessening because less worth means less money upon which the value theoretically exists. Plus in a cooling market, rates will drop organically as demand slackens which means you pay less on your variable loan.

Now, when the market is booming as it has been for the last decade.. ouch. Those few points can mean thousands of dollars more you have to pay when the adjustment happens.

Interest Only loans - you pay only the interest for the first 5 to ten years. This means you take the principal, calculate the interest you'd pay over the term and pay that off over a few years. After the term you have to pay the principal as one lump sum or refinance it over a longer span, which usually happens, but the catch is that you continue to pay interest but ALSO pay on the principal for the remainder of the loan.

Loans of these sort are very good for wealthy individuals or people that have a variable but steady income. The ideal way to use this loan is to take the money you're saving by not paying on the principal and invest it. When it comes time to pay the principal you take the money you've been investing for the last 5 to ten years and gouge a huge hole in the principal, if not pay in full. That's how you win interest only game.

If you're taking that extra money you save to, say, feed your kids you're going to screwed. Painfully. In an uncomfortable spot (the back of Volkswagen). Normally, in hard times, you could refinance the house with what equity you have earned bu paying both interest and principal. With these types of loan, you don't do that so you get to be the bank's bitch when you try to save yourself. You lose that safety by being po' and getting a loan of this type.

So, put these two together and you have a time bomb of pain especially when the national interest rates continue to rise and markets that get more expensive - say the last three years of the housing market (especially around Madison).

I was listening to NPR and a financial analyst introduced the term "affordability challenged." These are people that can't actually pay the future rates but still get the variable interest only loans. It means, essentially, lower class people or "workers" as she put it that won't have the necessary investments or salary increases to account for the increased mortgage payments. I laughed at the ridiculously "nice" term for poor-ass people. It's true, ultimately, that they cannot afford these houses... but they're still buying them. And you know, a market bust would be good for some of these people..barring the inevitable recession and wage decreases that would follow...

I hate to say that it's because of all those people, as well as the day traders that bust or the rich that spend all their money on their hummer, that I'm likely going to be able to get a house in a few years. The market will soften, if not bust completely, when the next few years sees the variable rates spinning. It sucks but, come on people, when did we become so myopic?

You know how people are dealing with these changes? They're getting 50 year mortgages. 50 years. 50! Most of the people that get these loans won't live that long. What then? Pass the debt to your children? Screw that; if that's what happens, the current generation of people are incredibly short sighted and selfish for it. That could ruin their lives depending what the world looks like in 50 years.

Ludicrous. Just ludicrous.

Current Mood: infuriated infuriated

18 comments or Leave a comment
From: thegelf Date: August 1st, 2006 01:14 am (UTC) (Link)
As I understood ariable rate loans, they don't increase a couple of percentage points every few years. They're tied to the federal interest rate, so in a strong market, the fed increases their interest rates to keep down inflation, and the interest rate on the variable rate loan goes up. If the bottom drops out of the market and the fed cuts rates to prevent a recession, then the rate on the loan goes down. The home equity line my parents have is like that.
abmann From: abmann Date: August 1st, 2006 01:24 am (UTC) (Link)
That's probably true, which is why I said a recession is really the only way for a variable interest rate loan to be good to people that don't make oddles of money in investments at the moment. If the fed keeps hiking rates, they's deed.
(Deleted comment)
abmann From: abmann Date: August 1st, 2006 01:09 pm (UTC) (Link)
True, some people thought about it. If you're smart, yuo can get a lot of benefit from these loans. You also did waht I said smart people would do, you used it not for basic, life sustaining activities because you didn't need to do so. The key is diong something money-earning with the extra money yuo save.

In Madison, it seems renting is somewhat cheaper. The housing market around here has been pretty nuts adn property taxes are very high. This may change as the market softens with the variable rates changes.
nathan_lounge From: nathan_lounge Date: August 1st, 2006 01:34 pm (UTC) (Link)
In most cases it's cheaper to rent than to buy. You're right about madison however, the city taxes, the weird geographic boundries, and the necessity created by the high volume of college kids pushes buying prices up while renting prices go down. This happens in alot of towns. However, I'd be willing to bet if you were looking at places outside of Madison, possibly as far as Janesville, Ponyette, or Middleton then you'd see a significantly differently shaped market.

And as far as poor people goes, you're mostly right. It's why my family never had anything nice.
aetrix9 From: aetrix9 Date: August 1st, 2006 06:32 pm (UTC) (Link)
Renting in Madison is WAY cheaper than owning. We have an absolute GLUT of rental properties and the rental companies are doing pretty much whatever to get people into them. My apartment at High Point Commons used to rent out for a 2-br for $825. We rented it for the first year at $675 and $650 for the second year. They're now renting for $600/mo.
aetrix9 From: aetrix9 Date: August 1st, 2006 06:30 pm (UTC) (Link)
Don't forget, when the Feds adjust the rate down with a recession, that corresponds a few years later with decreases in living wages and increased layoffs.
hagbard23 From: hagbard23 Date: August 1st, 2006 01:19 am (UTC) (Link)
Hey, that's totally my plan as well! Wait until the people who bought houses they can't afford have to sell them at a loss!
abmann From: abmann Date: August 1st, 2006 01:23 am (UTC) (Link)
I feel all predatory but I think it's a smarter plan especially as my worth slowly increases. In a few years, I'll be making excellent money, have lots of job experience, (hopefully) have nice savings and investments etc. Then I can pluck some nice 2 or three bedroom place for peanuts and laugh maniacally for the rest of my life.
nathan_lounge From: nathan_lounge Date: August 1st, 2006 01:36 pm (UTC) (Link)
Way to plunder and pillage.

Now if we can just figure out how to get rape in there, and you can do all three in a eyepatch with a hook hand on your robot arm, you'll have all the makings of a great pirate.
abmann From: abmann Date: August 1st, 2006 02:44 pm (UTC) (Link)
What about simulated rape? I'm pretty sure I know some people that would be keen on rape scenes. :P
nathan_lounge From: nathan_lounge Date: August 1st, 2006 03:06 pm (UTC) (Link)
I definately do.

I think it depends on how much booty you score.

Really it's all aout hte eyepatch.
nathan_lounge From: nathan_lounge Date: August 1st, 2006 03:06 pm (UTC) (Link)
and the horrible typing skrills.
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From: thegelf Date: August 1st, 2006 02:29 am (UTC) (Link)
The housing bubble in DC just popped. Houses and condos for sale are saturating the market, but they're still way out of anyone's price range (I passed one advertised as starting at $1.8 million yesterday), because no one is willing to sell at a loss yet. Also, none of the newly built houses are of a "sane" size. Most of them are 4 bedroom monstrosities. In a few years, the glut should cool off prices, but until then a house is out of reach and the apartment market stinks. Very few people can afford a house or condo right now, so everyone is trying to rent. Meanwhile apartment building owners are cashing out and renovating affordable apartments into high priced condos, reducing supply.

Somehow I don't think I'll be coming back to DC right after school next year...
nathan_lounge From: nathan_lounge Date: August 1st, 2006 01:43 pm (UTC) (Link)
DC has always been that way. I mean, not necessarily the shift in the S/D chart and the over-saturated market, but it is what a town becomes when you have money-makers from other cities living in it. The city itself doesn't have a cyclical econimc system like other towns because of the way different classes of people take and leave it. It's why you basically have DC proper, surrounded by a ring of ghettos, surrounded by the beltway, surrounded by nonsensical urban sprawl...all built on a swamp like some big rotten apple.
nathan_lounge From: nathan_lounge Date: August 1st, 2006 01:43 pm (UTC) (Link)
Opps...meant to say onion.
abmann From: abmann Date: August 1st, 2006 02:49 am (UTC) (Link)
I hate to say that I have no idea how this will affect renters. It will, to some extent, but I don't know how far. I should be OK for a few years to keep renting even if prices go up.
fencert From: fencert Date: August 1st, 2006 02:31 am (UTC) (Link)
Problem is, when the real estate bubble bursts, it's going to catapult the whole country into a huge recession. Lots and lots of jobs are going to be going down the tubes. I'm not sure there are many of us who can count ourselves as safe. The Fucking Republicans are hoping that they can hold the country together until the Democrats take over in 2008, and then let things fall apart and blame it on them. I don't think they will be able to stretch this economy out that long, though.

When I get back from Tucson, I have to check all the details of my house's mortgage. I can't remember how I set things up 5 years back... kinda hoping I locked in that nice low mortgage rate- at least I think that's what I managed to do.
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abmann From: abmann Date: August 1st, 2006 12:18 pm (UTC) (Link)
I want to know how the economy will handle a society living on credit. In recession people used to have their savings when it got bad. Now, very few have that - both the poor and the stupid rich. It could get ugly.
18 comments or Leave a comment