Mortgage debt and the housing bubble?
I am a homeowner - I am also a mortgage "owner" - an ARM (Adjustable Rate Mortgage) at that.
I took a chance on a 5 year ARM in 2003 because I could get a full percentage point lower mortgage rate guaranteed over 5 years. After 5 years I expect my rate to increase, but I'll have saved quite a bit in interest over the 60 months and I have an incentive to make extra payment to my mortgage and I'll save even more money over the long run by these payments.
Good logic for a single adult, no dependents, a good job, and disposable income available for investment.
Well, then there's my 40 year old furnace that just needed replacing - along with an old A/C, and OOPS - there goes 4 months of my "disposable income". Plus I should be replacing a crumbling 110' asphalt driveway in the future, then there's the magical dancing washing machine, and so on. Money doesn't always go as far as I'd like, even if I've made financially conservative decisions and a little room mate income goes a long way in keeping the money flowing.
Well, we'll see, but overall I'm content to let this mortgage ride - at least as long as I've got my job, and hopefully in the future I'll have a paid for house as my little nest egg.
My situation can be compared to a more financially aggressive coworker - half a generation older, and with a family, but he sold his house 5 years ago, upgraded, and got a full new mortgage and invested his original principal into stocks - just about the time for the tech bubble to burst and the Enron scandals and all that. He says he came out even, and I'll not argue - just glad that I'm not so foolish.
Then another comparison, a cousin, half a generation younger. She wanted to buy into a house last year - even as a cobuy with her roommate, but alas her finances were not impressive for mortgage loaners apparently. She's got a masters degree in environmental education, yet can't find a job with health insurance, and between two jobs, her best income is working in daycare. She has a pile of student loans to pay off, and a negligent foolish credit card debt mostly gathered during her school days - maxed out, with months of fees and now her APR is DOWN to a mere 16%. For a long while she was making minimum payments and wondering why her balance wasn't going down much.
She would like to enter the world of home ownership. She wants to buy into the game BEFORE the housing costs go far beyond her meager income to afford. In her frantic mind it's "Now or never" to get a seat at the table of the upper class.
Surely she's not alone. The low interest rates and skyrocking home prices have convinced many people that they stand on a decision where if they don't (or can't) act now, they'll be permanently punished into a rented life and poverty.
Who am I to argue? Life isn't fair, and I feel lucky to "get my foot in the door" when I did. I'm not convinced I'd make the same decision now 20 months later. And I came from a point of no debt, low expenses, and good income.
What right do I have to tell my poor cousin that she's better off playing it safe now - live frugally - work hard - pay off her debt as fast as she can - and then re-evaluate. She's still 27, not over the hill yet. What's another 2-3 years for her?
Well, if you believe the hype, perhaps home prices will continue rising 10-20%/year over that time. HAD she been able to buy now, her value increase would perhaps more than make up for her debt. With the new assessed equity, she might even get a second mortgage and pay OFF her current debt - move it happily onto a interest-deductible mortgage and be on easy street 5 years sooner than my humble approach of saving first.
Well, it's all fine and good to be hopeful, but is it believable?
Sure - housing values might continue to rise like they have over the last 5 years.
However I'm still skeptical. First home ownership has many costs she doesn't experience as a renter, and her nonexistent savings won't be able to cover unexpected costs. Not to mention probably new debt trying to furnish her new home. If she can't pay much more than minimum credit card payments now, how is she supposed to afford a house?
Why would anyone put themselves in such a tight predicament? Why is it SO IMPORTANT that she immediately get into a house BEFORE she's seriously able to comfortably live in it?
Because of FEAR. Because of impatience.
I'm not trying to say she's wrong to want things, to want to get ahead. I accept it is unfair that she should have to struggle for another 10 years before she's ready for home ownership.
People who "take risks" are the ones who get ahead, BUT they are also those who get screwed when "visions of green" change into "seas of red."
To put it bluntly, SHE is acting like a herd animal, following the skittish masses. SHE can't see the cliff that the herd can't see. She only knows that she's WEAK and if she falls behind, the lions and jackals are probably waiting for her.
There can be lots of reasons why home prices are going up, but a primary one is that a large number of people have decided to run up the same hill. Once the charge begins, it's a positive feedback.
Demand raises prices. Prices raise fears for those not quite ready to buy a home to follow. That creates more demand, raising prices more.
Well, I accept there's a lot more than that. There's market manipulation by the federal reserves to lower interest rates - allowing more people to afford larger mortgages - encouraging more home owners to refinance, clear their maxed credit cards so they can have another 3-4 year to max them out once again.
In short there's a rush for the money and everyone is selling their future security in easy debt now in a believe further increased value will erase it all over and over again.
Well, I for one don't believe in it. I know rationally that money earned through work is worth more to me than money earned through investment.
If I have money I don't need, I'll invest it in my family, community first interest free, or better yet donate it to charity where others more dedicated to community than me can help others in more need than me.
Sure, I'll be happy if my home increases in value, but I'm not banking on it.
Sure, I'll be glad if my home can allow me to be more independent, more responsible, and more able to give back. But I just see the responsibility all the way.
I really feel for people like my cousin, and yet I know I can't save her. I can't convince her that sacrifice now is necessary or valuable.
As a home owner I should be glad for ever increasing home values, and as a mortgage owner I'm a little paranoid about dropping values faster than I can pay off my mortgage, but I accept ultimately it's better for prices to fall - so others can make honest decisions on when they're ready to own a home and take on the responsibility only then - not out of fear.
I can't predict the future, but in my mind, a 20%, or even 40% DROP in home values over the next 5 years would not be a terrible thing to me personally - I can take it as I must. It's easier to be generous from the top, right? Maybe?
Let's avoid a return of inflation though, ok? Already, I give up hoping.
Whatever will be, will be. The future's not ours to see. Que sera, sera.
What the lord giveth, the lord taketh away.
I'm not even religious, but what perspective can there be for life each night but undying gratitude?
I took a chance on a 5 year ARM in 2003 because I could get a full percentage point lower mortgage rate guaranteed over 5 years. After 5 years I expect my rate to increase, but I'll have saved quite a bit in interest over the 60 months and I have an incentive to make extra payment to my mortgage and I'll save even more money over the long run by these payments.
Good logic for a single adult, no dependents, a good job, and disposable income available for investment.
Well, then there's my 40 year old furnace that just needed replacing - along with an old A/C, and OOPS - there goes 4 months of my "disposable income". Plus I should be replacing a crumbling 110' asphalt driveway in the future, then there's the magical dancing washing machine, and so on. Money doesn't always go as far as I'd like, even if I've made financially conservative decisions and a little room mate income goes a long way in keeping the money flowing.
Well, we'll see, but overall I'm content to let this mortgage ride - at least as long as I've got my job, and hopefully in the future I'll have a paid for house as my little nest egg.
My situation can be compared to a more financially aggressive coworker - half a generation older, and with a family, but he sold his house 5 years ago, upgraded, and got a full new mortgage and invested his original principal into stocks - just about the time for the tech bubble to burst and the Enron scandals and all that. He says he came out even, and I'll not argue - just glad that I'm not so foolish.
Then another comparison, a cousin, half a generation younger. She wanted to buy into a house last year - even as a cobuy with her roommate, but alas her finances were not impressive for mortgage loaners apparently. She's got a masters degree in environmental education, yet can't find a job with health insurance, and between two jobs, her best income is working in daycare. She has a pile of student loans to pay off, and a negligent foolish credit card debt mostly gathered during her school days - maxed out, with months of fees and now her APR is DOWN to a mere 16%. For a long while she was making minimum payments and wondering why her balance wasn't going down much.
She would like to enter the world of home ownership. She wants to buy into the game BEFORE the housing costs go far beyond her meager income to afford. In her frantic mind it's "Now or never" to get a seat at the table of the upper class.
Surely she's not alone. The low interest rates and skyrocking home prices have convinced many people that they stand on a decision where if they don't (or can't) act now, they'll be permanently punished into a rented life and poverty.
Who am I to argue? Life isn't fair, and I feel lucky to "get my foot in the door" when I did. I'm not convinced I'd make the same decision now 20 months later. And I came from a point of no debt, low expenses, and good income.
What right do I have to tell my poor cousin that she's better off playing it safe now - live frugally - work hard - pay off her debt as fast as she can - and then re-evaluate. She's still 27, not over the hill yet. What's another 2-3 years for her?
Well, if you believe the hype, perhaps home prices will continue rising 10-20%/year over that time. HAD she been able to buy now, her value increase would perhaps more than make up for her debt. With the new assessed equity, she might even get a second mortgage and pay OFF her current debt - move it happily onto a interest-deductible mortgage and be on easy street 5 years sooner than my humble approach of saving first.
Well, it's all fine and good to be hopeful, but is it believable?
Sure - housing values might continue to rise like they have over the last 5 years.
However I'm still skeptical. First home ownership has many costs she doesn't experience as a renter, and her nonexistent savings won't be able to cover unexpected costs. Not to mention probably new debt trying to furnish her new home. If she can't pay much more than minimum credit card payments now, how is she supposed to afford a house?
Why would anyone put themselves in such a tight predicament? Why is it SO IMPORTANT that she immediately get into a house BEFORE she's seriously able to comfortably live in it?
Because of FEAR. Because of impatience.
I'm not trying to say she's wrong to want things, to want to get ahead. I accept it is unfair that she should have to struggle for another 10 years before she's ready for home ownership.
People who "take risks" are the ones who get ahead, BUT they are also those who get screwed when "visions of green" change into "seas of red."
To put it bluntly, SHE is acting like a herd animal, following the skittish masses. SHE can't see the cliff that the herd can't see. She only knows that she's WEAK and if she falls behind, the lions and jackals are probably waiting for her.
There can be lots of reasons why home prices are going up, but a primary one is that a large number of people have decided to run up the same hill. Once the charge begins, it's a positive feedback.
Demand raises prices. Prices raise fears for those not quite ready to buy a home to follow. That creates more demand, raising prices more.
Well, I accept there's a lot more than that. There's market manipulation by the federal reserves to lower interest rates - allowing more people to afford larger mortgages - encouraging more home owners to refinance, clear their maxed credit cards so they can have another 3-4 year to max them out once again.
In short there's a rush for the money and everyone is selling their future security in easy debt now in a believe further increased value will erase it all over and over again.
Well, I for one don't believe in it. I know rationally that money earned through work is worth more to me than money earned through investment.
If I have money I don't need, I'll invest it in my family, community first interest free, or better yet donate it to charity where others more dedicated to community than me can help others in more need than me.
Sure, I'll be happy if my home increases in value, but I'm not banking on it.
Sure, I'll be glad if my home can allow me to be more independent, more responsible, and more able to give back. But I just see the responsibility all the way.
I really feel for people like my cousin, and yet I know I can't save her. I can't convince her that sacrifice now is necessary or valuable.
As a home owner I should be glad for ever increasing home values, and as a mortgage owner I'm a little paranoid about dropping values faster than I can pay off my mortgage, but I accept ultimately it's better for prices to fall - so others can make honest decisions on when they're ready to own a home and take on the responsibility only then - not out of fear.
I can't predict the future, but in my mind, a 20%, or even 40% DROP in home values over the next 5 years would not be a terrible thing to me personally - I can take it as I must. It's easier to be generous from the top, right? Maybe?
Let's avoid a return of inflation though, ok? Already, I give up hoping.
Whatever will be, will be. The future's not ours to see. Que sera, sera.
What the lord giveth, the lord taketh away.
I'm not even religious, but what perspective can there be for life each night but undying gratitude?
posted by Ares Olympus at 6:51 PM
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