Seattle Rides High on Interest-Only Loans

It seems that in the Seattle area, a lot of people are confident that there's not a bubble, as evidenced by the ridiculous loans that they're taking out:

...38 percent of recent home mortgages in the Seattle-Bellevue- Everett market...were interest-only loans.

38 percent for the first three months of 2005, up from 37 percent for all of 2004.

Yikes. Do these people even take pause to consider what their payments are going to be like if/when interest rates start going back up?

That compares with a national average of 19.1 percent nationally (actually down slightly from 2004) and 28.3 percent for the state of Washington.

Even 19.1 percent nationally seems high to me. How can lenders finance so many of these kinds of loans? Do they truly not see a risk in that?

The gamble on interest-only loans (in which the borrower pays nothing on the principal) is a good one, as long as the borrower retains the ability to pay, or as long as home prices hold their value.

Which of course are both in question when interest rates begin to go up.

The comforting conventional wisdom around here has always been that housing deflation is someone else's problem. With the natural constraints of water and mountains, artificial constraints such as growth-management regulations, continued in-migration and a robust, balanced economy, housing prices can only continue to go up. Let those cities with vast expanses of flat developable land such as Dallas or Atlanta worry about bubbles.

If people around here really believe that, they may be in for a rude awakening here soon.

In 2001, LoanPerformance says, the national and local averages for interest-only loans were both below 2 percent.

From 2 percent to 38 percent in just five years. If that's not a warning sign, I don't know what is. In spite of this, here is this reporter's conclusion:

Those who buy a home with the expectation of selling it within a few years are playing the greater-fool game -- that there will always be someone to pay a higher price for an asset than you did. For the past decade and a half in Seattle, that's been a good bet. It may continue to be a good bet for the rest of this decade.

But it is a bet. Housing-price appreciation is not guaranteed in the Constitution. Should conditions change, a lot of borrowers may discover, unhappily, that even in this locale, well-heeled greater fools are not an inexhaustible resource.

(Bill Virgin, Seattle P-I, 06.23.2005)