Wow, Elizabeth Rhodes is on a real anti-bubble roll this weekend. Did one of you submit this letter to her "Home Forum" Q & A?
Q: I keep reading that home prices aren't expected to decline in the Seattle area. Aren't you overlooking the possible effect of "suicide loans" — those adjustable-rate mortgages that are common and dangerous? I think the interest rates on those loans will go so high that many will be forced into foreclosure. Won't that produce a glut of for-sale homes that will force prices down?Okay I have to stop right there. "They may be able to increase their income"?!? Did she really just say that? Yeah, it's that easy Ms. Rhodes... When Mr. & Mrs. Too Much Homebuyer find that they can't afford to make their payments, why they'll just get new jobs that pay more!
A: Let's start with the basics on those adjustable-rate loans.
The riskiest are teaser-rate loans. These start at an exceptionally low interest rate (like 2 to 4 percent), then reset upward later to a higher rate that can double the borrower's monthly payment. Obviously borrowers who can't refinance out of these loans are at great peril — particularly if their loan has allowed them to make interest-only payments, their home hasn't appreciated much and they have little equity to work with.
However, it's not a given that foreclosure is in their future. If the local economy is robust, jobs are plentiful and housing demand is strong about the time their loan resets, holders of teaser-rate loans have options. They may be able to increase their income and keep the house or find a buyer and escape foreclosure.
Maybe I'm confused, but aren't there cities right now (San Diego, Sacramento) that have "robust economies" with "plentiful jobs" and yet are still experiencing a decline in prices? It seems to me that the one and only component that matters is that "housing demand is strong." Oh, and incidentally, housing demand is weakening across the nation, and even here in Seattle.
These loans can reset more than once, from one to 10 years after origination — meaning there's no one point at which distressed sellers will flood the market. Obviously, it's impossible to forecast whether the economy will be good years from now, allowing them to ride it out. Maybe it will. Maybe it won't.Okay, so we admit that basically "who knows" if it'll be a problem or not...
Loan Performance, a San Francisco-based mortgage-information provider, calculates that teaser-rate loans comprise 13 percent of mortgages in the Seattle-Bellevue-Everett area. Since January 2005, teaser-rate foreclosures have consistently been lower than 1 percent a month.Did you catch what she did there? The question was about adjustable-rate and "suicide" loans in general. However, Ms. Rhodes decided to shift the focus to solely "teaser-rate" loans, and then provided a statistic that shows "only" 13 percent of local mortgages fall under that specific category. What about non-teaser-rate loans such as plain old ARMs, negative amortizing, payment-option, etc.? Excellent use of misdirection, Elizabeth.
Furthermore, of course foreclosures are still going to be low for our area. As long as we're still experiencing double-digit year-over-year appreciation, it's easy to sell or refinance your way out of a risky loan. It's as though Elizabeth forgot the question (or more likely, just didn't feel like answering it), which was about where we're going, not where we've been or are.
I'm not going to bother quoting and responding to the rest of her answer here, because she's obviously chosen to answer a completely different question than what was asked. Go read it for yourself, and if you're convinced that her answer is sufficient, I guess you should go out and buy a house for 10 times your yearly income on a negative-amortizing, payment-option, no-money-down, adjustable-rate loan.
(Elizabeth Rhodes, Seattle Times, 09.30.2006)