Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: David Jones who wrote (5595)	9/28/2002 5:13:45 PM
From: Wyätt Gwyön	Respond to of 306849

Increase taxes I'll pass on and inflation well make 6% loans even better buy paying off in inflated dollars. the problem is a 6% loan today is actually an expensive loan in real terms. with inflation around 1% that is a real interest rate of 5%. this rate is well in excess of what real income growth will be over the next 30 years.b by comparison, my first mortgage in the early 90s was 8% when inflation was around 5%, for a real interest rate of just 3%. but in the early 90s it was a lot harder to get money anyway. i had to come up with a 20% down payment instead of 3% today. plus the 8% interest put a greater limit on the monthly payment i could "afford" according to the underwriting dept. also, the underwriting dept. was probably actually interested in my creditworthiness then, because Fannie Mae's presence was not so signicant. the loan originator actually kept my mortgage on their books instead of offloading it to a GSE. how quaint. notice that the affordability of the mortgage payment is determined by the nominal interest rate, whereas actual affordability over time is determined by the real interest rate. the above factors resulted in much less dollar competition for mortgages in the early 90s. consequently i was able to buy a first home for around 100K which today would cost nearly 300K. however, a buyer today could probably walk into the 300K house with a lower down payment and less creditworthiness than i was required to have at one-third the price in the early 90s. and this trend, which has resulting in a trebling in the nominal price of a certain house in a low inflation environment, is what the GSEs have wrought, and what is perversely referred to as increased "affordability". but just as the 100K asset purchased in a difficult funding environment had considerable "upside" as interest rates declined and funding terms eased, today the 300K asset purchased with 3% down at a 6% rate has considerable potential downside in the eventuality of increasing nominal rates and greater rigor among underwriters. while a "buy and hold" homeowner locking in at 6% may not be directly affected by a rise in rates, that does not mean the inflated asset value (whose inflation is due mainly to today's easier terms and the credit bubble) will not fall significantly. if nominal mortgage rates simply return to 8%, today's million dollar starter homes are likely to be very vulnerable imo. the current owners can keep their 6% mortgages, but new buyers will have to find "affordability" at 33% higher rates. this is where the market will go, because prices are set at the margin.