Trouble Around the Corner for the Real Estate Market?
Today, CNNMoney.com did an article called The Danger Years for Homeowners, which had some very interesting points to ponder.
According to Doug Duncan, the chief economist for the Mortgage Bankers Association, mortgage delinquencies have historically reached their highest points during the third and fourth years.
Here are some statistics that make the times ahead a little scary. According to the MBA:
- Half of all mortgages are three years old or less.
- 3 trillion in mortgages in 2002
- 4 trillion in 2003
- 3 trillion in 2004
Combine this with some of these other adjustable mortgage facts:
- Many were interest-only ARMS and the incredibly popular “pay-option ARM” loans which have negative amortization.
- In California, in Jan / Feb of 05’ 61% of mortgages where interest only…. This was only 2% in 2002 (Source: RealEstate Journal)
- Hybrid ARMS made up as much as 50% of all loans originated in 2004 / 2005. (this includes interest-only, two-steps, pay-options).
- In 2005 the median home new homebuyer only put down 2%.
- November of 2005, 70.9% of ALL mortgages in California were adjustable rate mortgages with a peak of 73.7% in May of 2005. (Dataquick)
- Use of Adjustable Rate Mortgages in 2002 was 28.9% in 2003 52.3% (Source: Dataquick)
- In 2006 there is approximately $330 billion in Adjustable Rate Mortgages are set to adjust.
- In 2007 approximately 1 trillion will adjust
Mortgages Rates at 40 Year Lows and Inverted Curves
On top of the increased use of adjustable rate mortgages, statistically the peak period for mortgage delinquencies, you also have the fact that we are coming off 40 year mortgage lows. Mortgage rates are increasing and short-term mortgage rates like Adjustable Mortgages are increasing even faster.
In 2003 the 1-Year T-Bill as approximately 1%, now we are close to 4.495%
Index + Margin = Interest Rate
This is a formula many people will become familiar with soon.
Index is the indicator used by the adjustable rate mortgage. This is the variable portion of the formula.
Margin is the spread of the mortgage bank, usually 2.25% - 6.5%.
Example Adjustable Rate Mortgage adjustments assuming a 3% margin.
1 Yr T-Bill = 4.495% + 3% = 7.495%
1 Yr. LIBOR = 5.152% + 3% = 8.152%
COFI = 3.347% + 3% = 6.347%
CODI = 3.837% + 3% = 6.837%
COSI = 3.460% + 3% = 6.460%
As you can see from this snap-shot, most adjustable rate mortgages will be equal to or higher than current 30 year fixed rate mortgages. For many homeowners, their mortgages will easily adjust the maximum capped 2% above the start rate.
The real issue to this is that not only is the mortgage rate going up, but you may also be going from an interest-only loan to a fully amortized loan and you are now financing the entire balance for a shorter term.
We have created some mortgage calculators to see the exact adjustments:
Pay Option ARM / Negative Amortization Mortgage Calculator
2 / 28 Adjustable Rate Mortgage Calculator
3 / 27 Adjustable Rate Mortgage Calculator
5 / 25 Adjustable Rate Mortgage Calculator
Doomsayers think that this may be the catalyst to the housing bubble… while optimist believe that the real estate market and consumers have enough strength and will escape unscathed.
One thing is certain, is that a significant increase in mortgage delinquencies, creates bank foreclosures and when there is enough bank foreclosures, this puts downward price pressures on all other properties. Homebuyers begin looking for deals in foreclosures and home sellers are competing directly against discounted foreclosure listings for the homebuyer’s attention.
Is the real estate market going to be affected? Only time will tell but we would like your thoughts and reason why or why not the real estate market will be affected?
According to Doug Duncan, the chief economist for the Mortgage Bankers Association, mortgage delinquencies have historically reached their highest points during the third and fourth years.
Here are some statistics that make the times ahead a little scary. According to the MBA:
- Half of all mortgages are three years old or less.
- 3 trillion in mortgages in 2002
- 4 trillion in 2003
- 3 trillion in 2004
Combine this with some of these other adjustable mortgage facts:
- Many were interest-only ARMS and the incredibly popular “pay-option ARM” loans which have negative amortization.
- In California, in Jan / Feb of 05’ 61% of mortgages where interest only…. This was only 2% in 2002 (Source: RealEstate Journal)
- Hybrid ARMS made up as much as 50% of all loans originated in 2004 / 2005. (this includes interest-only, two-steps, pay-options).
- In 2005 the median home new homebuyer only put down 2%.
- November of 2005, 70.9% of ALL mortgages in California were adjustable rate mortgages with a peak of 73.7% in May of 2005. (Dataquick)
- Use of Adjustable Rate Mortgages in 2002 was 28.9% in 2003 52.3% (Source: Dataquick)
- In 2006 there is approximately $330 billion in Adjustable Rate Mortgages are set to adjust.
- In 2007 approximately 1 trillion will adjust
Mortgages Rates at 40 Year Lows and Inverted Curves
On top of the increased use of adjustable rate mortgages, statistically the peak period for mortgage delinquencies, you also have the fact that we are coming off 40 year mortgage lows. Mortgage rates are increasing and short-term mortgage rates like Adjustable Mortgages are increasing even faster.
In 2003 the 1-Year T-Bill as approximately 1%, now we are close to 4.495%
Index + Margin = Interest Rate
This is a formula many people will become familiar with soon.
Index is the indicator used by the adjustable rate mortgage. This is the variable portion of the formula.
Margin is the spread of the mortgage bank, usually 2.25% - 6.5%.
Example Adjustable Rate Mortgage adjustments assuming a 3% margin.
1 Yr T-Bill = 4.495% + 3% = 7.495%
1 Yr. LIBOR = 5.152% + 3% = 8.152%
COFI = 3.347% + 3% = 6.347%
CODI = 3.837% + 3% = 6.837%
COSI = 3.460% + 3% = 6.460%
As you can see from this snap-shot, most adjustable rate mortgages will be equal to or higher than current 30 year fixed rate mortgages. For many homeowners, their mortgages will easily adjust the maximum capped 2% above the start rate.
The real issue to this is that not only is the mortgage rate going up, but you may also be going from an interest-only loan to a fully amortized loan and you are now financing the entire balance for a shorter term.
We have created some mortgage calculators to see the exact adjustments:
Pay Option ARM / Negative Amortization Mortgage Calculator
2 / 28 Adjustable Rate Mortgage Calculator
3 / 27 Adjustable Rate Mortgage Calculator
5 / 25 Adjustable Rate Mortgage Calculator
Doomsayers think that this may be the catalyst to the housing bubble… while optimist believe that the real estate market and consumers have enough strength and will escape unscathed.
One thing is certain, is that a significant increase in mortgage delinquencies, creates bank foreclosures and when there is enough bank foreclosures, this puts downward price pressures on all other properties. Homebuyers begin looking for deals in foreclosures and home sellers are competing directly against discounted foreclosure listings for the homebuyer’s attention.
Is the real estate market going to be affected? Only time will tell but we would like your thoughts and reason why or why not the real estate market will be affected?
1 Comments:
Great, comprehensive post, Jessie. When you factor in the impending day of reckoning by international credit providers, it bodes very badly for the real estate and shares markets.
Hard assets (oil, capital goods, & commodities) are more attractive ways to invest the $5 trillion trade surplus that they've amassed over the past eight years. The US Treasury will have to offer higher rates to continue to attract these trade dollars to re-fund bills, notes and bonds as they come due.
Add to this the fact that our productivity and real wages continue to drop. We cannot grow our way out of this morass and grow continuously less able to sustain our economy without an ever growing credit bubble from abroad.
Then add in the biggest detriment of all: oil reserve depletion and the escalating cost it presents to transportation, feed stocks, fertilizers, etc. This is all highly inflationary and will put addtional upward pressure on interest rates.
Lastly, every crash in modern times (from 1720 South Sea bubble forward) occurs at the peak.
Batten down the hatches, its going to be a hard landing, if not an out and out crash.
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