From today’s Washington Post, “Many Buyers Opt for Risky Mortgages“: More than one third of the mortgages written in the Washington metro area this year are interest-only mortgages, loans that allow home buyers to pay back only the interest while delaying payment on the loan principal for years. Housing prices have gotten so exorbitant that home buyers are turning to these risky mortgages as a way to cut their payments to a level they can afford.
Explains the Post: “The loans are attractive because their initial monthly payments are tantalizingly low — about $1,367 a month for a $320,000 mortgage, compared with about $1,842 a month for a traditional 30-year, fixed-rate loan. If home prices fall, though, borrowers could lose big.”
This kind of flimsy financing is a sure sign of a market top. I was warning about the real estate bubble in November 2003, but I didn’t have a sense then of imminent danger. I do now. (Ed Risse reads the tea leaves similarly. Read his more detailed treatment in “The Shelter Crisis.”) Housing prices cannot increase at a sustained rate of 20 percent per year, as they have in Northern Virginia, or even 10 percent a year, as they have elsewhere, when personal incomes are increasing at the rate of 5 or so percent per year. The collapse is inevitable, and when it comes, it’s going to cause a lot of pain. Many, many homeowners, especially the poor saps who put little money down, will find themselves with negative equity.
There will be tremendous political ramifications, too. Homeowners hate rising property taxes, but they’re willing to swallow them when property values are rising. I may be paying an extra $1,000 a year in taxes this year, but my house just increased $15,000 in value. I can always borrow against my increased equity. Once property values drop, local governments will face a crisis. They will have to increased property tax rates dramatically to compensate for falling assessments. But as homeowners see their net worth shrinking, they will find their taxes to be far more burdensome. Just as a collapse in housing prices is inevitable, particularly in Northern Virginia, so is the political upheaval that inevitably will follow.
