The implication of the media is that people are buying these homes to flip them, and when the value doesn't go higher they will freak out and become casualties of the new higher rates and will have to default on their houses, leading to a continued glut of homes.
No, Cramer. The implication is that the people are NOT flippers. They are buying with the intention of holding the houses, and therein lies the danger.
Sorry, that's just stupid. I am sure some of the borrowers are speculative, but you know what? Funny thing. The borrowers are not morons. They can read the papers, too. They recognize that homes aren't selling.
Funny thing. My brother has an interest only mortgage and thinks everything is fine. He reasons that, although Michigan home prices are declining, his neighborhood will be spared. And although his neighborhood is declining, it's temporary because of certain ongoing construction and their home prices will rise again starting in 1-1.5 years.
My father, who lives a half hour away, believes that his house won't fall in value because it's near a lake. (That's right, not on a lake, just near a lake.) Even though the next town over had a Ford plant shut down, and even though he follows the papers and knows how things are crashing Michigan-wide and nationally.
I would bet that most of these borrowers are simply younger people with new jobs who are correctly taking advantage of a low rate. People who have taken this rate have been very right. The long end hasn't gone up.
LOL. These borrowers were betting that the SHORT END would fall or not rise, and they were completely wrong and continue to be completely wrong. The long end has gone up, too, just not as much. And by the time these jokers go to refinance, the long end may very well be higher. REGARDLESS, they lack the financial resources to lock in the long end with a traditional mortgage.
So while they build up some savings with the low rate, they get stronger down the road and then can take the higher rate.
How do you build up saving when you gambled the short rate would stay low, but it's rising higher and higher? How do you save when your ARM readjusts in 2007? REGARDLESS, these people are not saving one penny of the money. They stretched to get the house, and they are using the "equity" to improve their homes.
These loans work as long as employment stays steady. The fact that it has tells me not to worry, that this is just another phantom problem not worth fretting about.
The mindless refrain that "everything will be fine as long as everything is fine" is just about over. Unemployment is rising, Dow Transports are crashing, yield curve inverted, stock markets falling, etc. Game over in 2007. |
