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Thursday, June 09, 2005


adjustable rate mania

kash at angry bear seems to confirm what many have suspected in an analysis of mortgage rates -- people are overextended in trying to enter the housing market.

... the chart above tells the story of millions of home buyers who are spending more than they could afford at an interest rate of 5.5-6.0%. After all, if they could afford their house at 5.5%, and if they don't expect interest rates to fall dramatically, then they would have chosen the fixed rate mortgage, not the AR mortgage.

This is bad news, because an interest rate of 5.5-6.0% is not that high... and yet it's too high for many recent home buyers. If 1-year interest rates to rise by just 1.5%, millions of recent home buyers will find their mortgage payments unaffordable. Yet there are plenty of reasonable scenarios that raise 1-year interest rates by that modest amount in the next year or two... which means that we shouldn't find it surprising if millions of recent home buyers soon find themselves unable to afford to live in their own houses.
when it's less expensive to rent the place you own, when buyers are dependent on a narrow margin of interest rates to stay competitive, the bubble's break cannot be far away.

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