--- In FairfieldLife@yahoogroups.com, off_world_beings <[EMAIL PROTECTED]> wrote: > > --- In FairfieldLife@yahoogroups.com, akasha_108 <[EMAIL PROTECTED]> wrote: > > > > This, if a continuing trend, would signal a trend in the > > (long-anticipated) rise of long term bond rates -- the "solution" to > > the conundrum Fed Chariman Greenspan has been commenting on for some time - the flattening of the yield cure -- the rise in short term rates (that the Fed can highly influence) while long-term rates (upon -- which fixed mortgage rates are based -- and the periodic adjustment in ARMS are pegged) are flat or declining > > > > Steadily rising mortgage rates may be trigger for housing price > > deflation --- (the bursting of the housing bubble) given that it has contorted itself to such unsustainable levels. >> > > > and most have a cap of how much they can rise > above the initial rate. So if you have an 8% rate then, under the > worst case scenario, your rate would go to 14% and that would be the > highest allowed by law. Therefore the mortgage rate increase is not as dire as people think. It is not like your rate could go up to 20% or 30% or something. Are you aware of this?
No one is predicting 30% rates. But do you realize what an additional 6 % points would do to the housing market? (btw, my experience with ARMS is the lifetime cap is higher than 6%, but lets use your figures.) Current rates are approaching 6%. So lets look at buying a house with an arm at 6%, and then what happens in 3 years if they rise to 12%. Both to the buyer, and the whole housing maket. Lets assume 20% down, and the buyer maxes out the % of income lenders wil usually allow for a mortgage, 30%. So a bloke making 96k a year, could afford a 500,000 house, if he ponied up 100k down. Monthly payments would be just short of $2400/month. 28,800 annually. Thats 30% of his pre-tax income. Now if his ARM goes to 12%, his payments become 4,114 a month and 49,373. per year. Thats now 51% of his income. A pretty big chunk. If taxes after deductions average about 24%, and he puts 10% in a 401k, then he has about 15% of his income 1 in 6 dollars to buy food, car, clothes, vacations, additional health, entertainment, etc. A bit of a pinch. If the ARMS lifetime cap were 9% -- more real world I believe than 6%, then 63% of income goes to house payments. After taxes and 401k, he has 3% of gross income to spend on food, car, clothes, vacations, additional health, entertainment, etc. But the news gets much worse . When he bought his house, people in his income range could afford a 500k house, with 20% down. If interest rates rose by 6% points, the same range buyers could only afford a 290k house -- a 42% drop. And the same happens to all ranged of buyers. Suddenly, buyers can only afford and qualify for 58% of the cost of a house they could three years before. Thus, they bid at their max. Sellers begin to lower prices to match demand and in time, prices of comps for the blokes 500 k house are now in the $290 range. If he sells, he loses his down payment, plus owes the lender $110k extra. Well, he could walk away you say. Sure. And ruin his credit. And he would still lose his 100 k down. And the lender would forgive the remaining loan of 110k after it forclosed. But the IRS counts that as income and the guy would pay taxes on that 110k. And long term rates that new buyers face are not capped. So if they rose 9 % points over todays rate, buyers would be able to buy only about 47% of the price of a house they could when rates were at 6%. The market corrects, and prices approach 50% of their former recent value. And markets may overcorrect, as people are forced to dump property. Thus prices could even go down further. And all this just from a jump in interest rates. But since the economy has been fueled by spending from home equity loans based on recent appreciation, and construction spending, this would halt suddenly if housing prices drop. The economy could go into a sharp recession. Employment rates would fall. Thus there would be less buyers than before -- driving prices even lower. So the art ------------------------ Yahoo! Groups Sponsor --------------------~--> Get fast access to your favorite Yahoo! Groups. Make Yahoo! your home page http://us.click.yahoo.com/dpRU5A/wUILAA/yQLSAA/JjtolB/TM --------------------------------------------------------------------~-> To subscribe, send a message to: [EMAIL PROTECTED] Or go to: http://groups.yahoo.com/group/FairfieldLife/ and click 'Join This Group!' Yahoo! Groups Links <*> To visit your group on the web, go to: http://groups.yahoo.com/group/FairfieldLife/ <*> To unsubscribe from this group, send an email to: [EMAIL PROTECTED] <*> Your use of Yahoo! Groups is subject to: http://docs.yahoo.com/info/terms/