High Rate of Interest-Only Loans a Concern in Virginia
By Kirstin Downey
Washington Post Staff Writer
Saturday, May 28, 2005; Page A01
More than a third of the mortgages written in the Washington area this year are a risky new kind of loan that lets borrowers pay back only the interest, delaying for years repayment of any loan principal. Economists warn that the new loans are essentially a gamble that home prices will continue to rise at a brisk pace, allowing the borrower to either sell the home at a profit or refinance before the principal payments come due.
What. The. Fuck.
Just five years ago, only about 2 percent of home-purchase loans in the Washington area involved interest-only terms.
This is how my home equity line of credit is setup. I can pay the interest on the money I borrow until the day I die and never pay the principal. I am not sure I would ever want to do that. What does this have to do with the housing bubble?
A home equity line of credit is something you own in the first place, and people running their equity down to zero dollars is vanishingly rare. By contrast, with interest-only loans, pretty much everyone has little or no actual equity.
It’s analogous to how you can tell the stock market has gone nuts by looking at the percentage of stocks bought on margin.
I don’t think it’s such a bizarre bet. Some of these interest rates are around 5% or so. After your tax deduction, you are basically betting that the value of the house keeps up with inflation.
It’s called leverage. You buy the house as an investment in an area that has shown rising property values. You rent it out and pay only interest. A year or two later you sell and pocket the rise in equity. This is just wonderful during a real estate bubble. But when it bursts, it’s pretty easy to go bankrupt. (I’m done for now.) Paid for my new Lexus. (I may act the fool…)
According to LoanPerformance Inc., a San Francisco mortgage data firm, about 8.5 percent of mortgages nationwide in the first 11 months of last year were taken out by people who did not plan to live in the houses themselves, up from 5.8 percent in 2000. In some markets, that proportion is much higher: in Phoenix, more than 12 percent of mortgages were taken out by investors; in Miami, the figure is 11 percent.
The National Association of Realtors, a trade organization that represents real estate brokers, said in a study being released on Tuesday that the percentage of homes bought for investment might be as high as one-quarter of the 7.7 million sold last year.
“Americans are treating real estate as a viable alternative to stocks and bonds,” said David Lereah, chief economist at the Realtors association. And some are buying at least two properties at a time.
People have been talking about over priced housing in some areas of the US and in other parts of the globe for some time. Low long term rates have fueled a rapid rise in asset prices.
The anti-bust people talk about a lack of supply ( the old we’re not making any more land theory ) while the pro-bust people talk about how all metrics which were previously used to measure home prices are totally out of wack right now ( eg: rent returns vs. asset cost ).
I think that everyone knows that housing prices will sooner or later come down ( or be flat for a decade or so, same thing ). The question is when. It’s just like the internet stocks from 1996 on. Everyone knew that they were overvalued but the probem is until the market corrects there is a lot of money to be made.
