TexasBill

Housing Prices: Bottom or Temporary Bear Break?

BTW, if the teaser rate ARM game is no longer an option, the implication is that the above referenced home buyer can only afford to pay for a home that allows them to have a 220k fixed rate loan at 6% for the 1,319 a month they can afford to pay. This means, on average, that housing prices will have to fall 38% +/- from the peak. Worse if you factor in that now they have to have a down payment while before they could get 100% financing.

Housing Prices: Bottom or Temporary Bear Break?

It's not that complicated to understand what happened. As ReEconomist said: "People were buying (monthly) payments not price."

Prices dramatically increased starting in 2001 because the Fed opened the floodgates; by reducing short term interest rates and actually encouraging folks to shift to ARMs instead of fixed rate loans, it made it possible for someone to pay much more for a home for the same monthly payment they would pay for a fixed price loan.

ARMs had "teaser" rates of 1-2%. At 6% for a fixed rate 30 year mortgage on a 220k loan your monthly payment was 1,319.00; it did not take a genius to figure out that with a 2% ARM, assuming amortization over the same 30 years, you could buy a 356k home for the same monthly payment. People rode this horse as long as they could sell their appreciated home or refinance into another ARM before their loan reset.

This strategy is no longer viable; but while it was, it enabled a lot of people to grab the brass ring.