hi Jay,
I mean, after all, J6P puts 25% down, leverages 75%, watch the house value go up 100%, and his RE NAV increase to 5x, takes out a second mortgage to extract the equity increase, forgets to pay down his high interest credit card debt, buys an SUV and specs on some shares, feeling secure in his 100k per year job, happy about decrease in his debt service cost, and all is well under the heavens.
i think you're giving J6P way to much credit...or rather, not recognizing just how much credit J6P gets. J6P does NOT put down 25%. i believe housing inflation is driven by easy credit. let's back up a few years. in 1992, i bought my first house for around 100K and had to put down 20%. it took me a long time to save up that money to begin with, and then the lenders were very strict about making sure i made enough to cover the mortgage. i sold later, but now that house is probably worth 275K or so--perhaps more last summer.
meanwhile, i know a young couple who last summer bought their first house. 100K won't get you anything in town anymore, so they went way out in the boonies and paid 180K. they put 3% down and carry a 174K loan. they qualified based on their two salaries at startups. now one of them has been laid off (co. out of business) and the other's salary is not enough to cover mortgage plus car payments plus other bills. also, the employed one's company is also a schlocky startup whose days are numbered.
it is people in that kind of situation that push up housing prices--the banks give them a low-downpayment mortgage which is very large, based on salaries that may not be a good indication of stable earnings prospects. and i imagine it is the same people who will end the housing boom as they lose jobs and are unable to service their debts. |
