ARM rates go up... will the real estate market see a glut?

[JuniperLea]

Do you think many of the people who are stuck with ARM loans will default? Sell quickly?

I think that many will not be able to afford a fixed rate mortgage for the home they currently have, otherwise, they would have got the fixed deal in the first place.

I'm skeerd! I have almost exactly 25% equity in my home right now, when you consider homes recently sold in my 'hood. I've been there two years and was hoping to "buy up" in another two or three. My mind is moving fast and furious... if I were to sell now and get my chunk of equity out and then buy when these people are flooding the market with houses, I think I could do pretty well. If I don't get out in time, I'm afraid I'll be stuck in a "starter" home.

[Syncronaut Seven]

1. What? You want me to blow on the dice or something?

:P

[JuniperLea]

4. Yes, dammit! Get on that!

heh!

:p

[Lex]

2. Most Adjustible Rate Mortgages can only go up about 1% pt. per year

and then cap out at some point, right?

[JuniperLea]

3. I don't think so

I think they are tied to prime and can only go up so much over prime!

[ixion]

5. nope.. it's more like a credit card

that fluctuates according to prime.

[Lex]

8. After a inital period of fixed rate, then an ARM adjusts

periodically, every 6 months or every 12 months (1 year), until it caps out.

The adjustment is tied to the current Index.

[unblock]

9. typical limitations are 2%/yr, 6% lifetime OR 1%/yr, 4% lifetime.

this is for adjustible mortgages, which usually adjust annually, possibly after being fixed for say, 3, 5, 7, or 10 years. some adjust every 6 months. i assume you can get some that would adjust monthly as well, but i don't think that's the norm.

helocs (home equity lines of credit, i.e., second mortgages) do tend to adjust monthly, so there's not much point or value in any cap.

[Lex]

10. Thanks that what I thought.

:thumbsup:

[Theodolite]

15. On a $300K loan

the adjustment will amount to a monthly increase something like $700. If you followed popular advice and bought as much house as you could afford, you might already be struggling with your finances. In that case a $700 monthly increase would be a significant amount. Actual numbers for different loans are shown here :

http://anotherfuckedborrower.blogspot.com/2006/01/serial-refinancing-or-surreal.html

[unblock]

16. uh, wrong.

each 1% increase in interest is about a $56 increase per $100,000. So we're talking about $170 on a $300,000 loan.

the link you provided shows what happens when an INTEREST ONLY mortgage enters the principal payment period. you go from paying interest only to paying interest AND PRINCIPAL. so, of course your monthly payment increases, even having nothing to do with any change in interest rates. of course, you get something in exchange for that principal payment, namely a reduction in your mortgage balance, whereas you get nothing in exchange for your higher interest payments (except for the possible tax deduction, of course).

[Theodolite]

18. Oops

My mistake, I thought we were talking about the I/O ARMs. I/O ARMS are much more likely to cause serious damage.

[unblock]

19. true, but i/o arms are not for novices

i/o arms are useful as very short term real estate investing, or for avoiding a bridge loan when you're switching homes.

they can make sense if you like buying fixer-uppers, renovating them, and selling them, and have no intention of living there long-term, or better yet, it's not your primary residence at all, it's purely an investment property.

but buying an i/o arm on your primary residence when you might reasonably live there long term is playing with fire -- its power can be harnessed if you really know what you're doing. otherwise, you'll just get burned.

[ClintonTyree]

6. There lies the rub....

if you're happy where you are and are living within you means.....stay. However, if the housing market tumbles and you lose all of your equity because of prices dropping like a rock.....leave.

Do whatever you think is right I guess. You know what the facts are anyway and have the luxury of having a choice. Millions of people wrapped up in those ARMs don't have a choice. It's tits up for them. Consider yourself lucky.

[JuniperLea]

Thanks for that

Yes, it could be worse... much worse.

I have a fixed. I kiss myself! SMOOCH SMOOCH SMOOCH! Good thinking, Juniper!


The problem is, I'd be stuck. I wouldn't leave... couldn't actually. I'd never be able to buy anything else w/o that equity as a down on something else.

[Atman]

7. There's already way too much inventory

You can't drive down any street in my bucolic New England neighborhood with passing two or three FOR SALE signs...and they've all been there for ages, it seems.

[Donailin]

13. same here in suburbs of DC

Montgomery county. . . for sale signs EVERYWHERE and more and more rent signs too. That must signal that houses are now sitting and owners need to fill the vacant homes they thought they'd turnover in a a year. Not for nothing, but I saw this coming a mile away. There is no way in hell that a townhome with 2/2 should cost 450k. That's just nuts. No toenhome should cost half a million dollars when only five years ago it was selling for 180k.

[Warpy]

11. There's already a glut

with the average house staying on the market in central Florida for about four months, and I think it's probably longer in markets that are no longer considered "hot."

The question is whether or not prices will come down and if they do, how fast.

There's a lot of housing stock out there sitting empty because investors snapped it up hoping the "bigger fool theory" would enable them to turn a large and relatively quick profit on it in a couple of years. If they remember earlier declines that were temporary, they may try to hang onto these white elephants. If not, there may be some panic selling as creative financing bites them in the ass.

The real problem is that people have been counting on paper profits in housing to leverage more consumer debt, debt they've needed to keep their lives going in a climate of falling wages and inflating everything else.

The end of expectation of more money rolling in via the real estate appreciation route is going to have a serious effect on the consumer economy, I'm afraid, even if there isn't much of a housing price crash.

[FloridaPat]

12. Here in Lakeland they're still building like we'll be invaded again from

the Northerners. Prices still going up for vacant land, as far as I can tell - 1/2 acre improved $85,000.

[Neil Lisst]

14. When the summer electric and gasoline bills hit, forecloses will

be coming later in the year.

Inflation for the bottom third is much worse than in the general economy. The guy who makes $6 an hour pays the same rate for gasoline as the guy who makes $600 an hour, but the second guy barely feels $4 a gallon.

[lectrobyte]

17. There are so many factors in making a decision like that I'd almost

not even want to bother asking for advice from a lot of strangers, even here on DU... How's your job situation? If you sold now, where'd you live until you snapped up that foreclosure bargain? How can you tell when the bottom is really the bottom (i.e., you don't want to get on the elevator while it's still going down)? Are rising interest rates going to wipe out the cost savings -- the house may be cheap, but when you go to get that loan is the real test.

I personally like to stay in a house five years, but that's just me. I also like fixed rate mortgages, no debt, and frugality etc.