Homeowners are taking the risky route and I am confused
December 13th, 2006 - 27 Comments
Does anyone else find this weird?
…a one-year ARM, at 5.8 percent on average, now costs only a third of a percentage point less than a 30-year fixed-rate mortgage, at 6.2 percent. And ARM holders still face the risk of paying a higher interest rate down the road.
But while there’s a new refi boom in swing, not all borrowers are rushing for the security of fixed loans. One in three homeowners refinancing today is choosing the financially riskier interest-only and payment-option ARMs, according to data from Loan Performance.
Many who are doing so may have chosen those mortgages not because they want them but because they can’t afford the payments that would come due under a 30-year fixed rate, said Keith Gumbinger, HSH’s vice president.
(ARM = adjustable rate mortgage, a mortgage with an interest rate that can change over time.)
Wow. So these homeowners are simply betting that (1) home prices will continue to rise, and/or (2) interest rates won’t rise very much? I’m still learning about real estate, so am I missing something?
“Some may be speculators who want to flip their property when prices improve and want to keep their costs as low as possible in the meantime,” the article adds, which could be a good alternative explanation for what’s going on.
I’m from Sacramento, which has been one of the hottest housing markets in the country for the last few years (here’s some data from 2003). I had lots of opportunities to buy houses with prices that were going up $10,000 per week, where I had to put my name in a raffle just to get the opportunity to buy a house, but I didn’t for a few reasons:
1. I don’t understand real estate (sounds familiar)
2. I don’t understand investing in something when people are getting irrationally excited about it and there’s time pressure, which I pointed out earlier this week usually causes bad decisions. Maybe I’m just not that cool
3. I didn’t want my cash flow going into real estate. Instead, I took it and invested it in myself and my own businesses, which I’m betting can produce a better return than the stock market or real estate. More on that later
Now, with foreclosures and people stagnant growth in real estate, there are blogs like http://thehousingbubbleblog.com where lots of people are gleeful about the impending doom of the homeowners who made bad decisions. I don’t really care about saying I-told-you-so, but I do want to share what happened when I told people I wasn’t going to invest in real estate.
“What?” people said. “You’d be crazy not to buy now. You can put $0 down!” People also thought I was misguided when I told them that I’d consciously decided not to invest. ‘You must not understand’ was a common sentiment I received, along with a pitying look. And more than one person said, “But real-estate prices don’t go down.” True, over the long term, the real-estate market has done well (not as well as the stock market, though). But the short term can really affect you, especially if your ARM payments jump from $1000 to $1900/month. That’s very likely for lots of people when their ARM comes up–and do you think the average family can afford a doubling of their mortgage?
Yet another point for long-term outlook and not investing in stuff you don’t understand. I think. Unless I’m missing something.
(Btw, I’m far from an expert in real estate and I’m still learning a lot, so last year I brought in Owen Johnson to write a series of real-estate posts last year on iwillteachyoutoberich.)
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