ARM Threat Overstated, At Least in Near Term
Writing in the Business Week real estate blog Hot Property, Peter Coy calculates that only about 4% of homeowners will have their mortgages reset in 2006. He arrives at this number by crunching some data from the recently released Harvard 2006 Housing Study: Here’s the math: Only about two-thirds of homeowners carry a mortgage at…
Writing in the Business Week real estate blog Hot Property, Peter Coy calculates that only about 4% of homeowners will have their mortgages reset in 2006. He arrives at this number by crunching some data from the recently released Harvard 2006 Housing Study:
Here’s the math: Only about two-thirds of homeowners carry a mortgage at all. Of those, only about one-quarter have adjustable-rate mortgages. And of those with adjustable-rate mortgages, only about one-quarter are scheduled to reset their rates in 2006. That’s one-quarter of one-quarter of two-thirds, which Excel tells me is 4%.
In addition, Coy notes that only 3% of people have less than 5% equity in their homes and 87% have at least 20%.
Only 1 in 20 Rates to Rise [Hot Property]
Almost all of the new buyers in the past two years in my coop are young people who bought with ARM and loans/gifts from parents for the downpayment. They all expect to sell before the rates go up and make a killing so they can buy bigger more expensive places — that $500K one-bedroom will be at least $750 in 2 years they think. And they don’t care about the rates going up because they will be gone….I have had only one question — if rates go up, what young couple will be able to buy their place with a $600K mortgage? But then, they have all grown up seeing rates go down and prices go up so…
Why the disparity between prices and tax acessed (spell check) values? Everytime I look at something on PShark, the most recent sale (if within a few years ago) is a few to several hundred thousand dollars higher than the tax acessment. In a down market, are the acessed values equal or higher?
“WHICH IS WHY i think it can’t happen. people talk about “worst case scenarios”, but any thing that includes near-term prices dropping back to say, 2000 prices, would only result in a whole new feeding frenzy. imho.”
Feeding frenzy driven by whom? The scores of people who are suddenly feeling much poorer after the market drops 50%? And how much will they be able to afford if mortgage rates are 9% (not at all unlikely if the mortgage market is unraveling after such a massive asset revaluation)?
Only fundamentals will bring the market back and right now we are far beyond sensible valuations based on fundamental measures like cap rates, price-to-rent ratios, etc.
“WHICH IS WHY i think it can’t happen. people talk about “worst case scenarios”, but any thing that includes near-term prices dropping back to say, 2000 prices, would only result in a whole new feeding frenzy. imho.”
You could be right – however, interest rates were much lower these past few years than they are now. And even real estate people predict they’ll be near 7% soon, which although historically low will hurt a lot of people trying to “get into the market.” There’s also the market psychology factor – if prices dropped like that, many people will not want to catch that falling knife. It’s a worst case scenario for sure but I wouldn’t say it CAN’T happen – anything is possible, right?
Also, even if 4% is the correct national average of people whose ARMs will adjust, not all of those people are going to have to sell (or even sell quickly if at all) because of the adjustment…
anon 11:21 – you hit on something important, i think. “if nice bright condos start popping up for $500 a square foot this winter…”
could you imagine? seriously, if interest rates remain in the upper 6’s and new developments start selling for $500 sq ft this year it would be MADNESS. There would be lines again. I would sell my tiny co-op and be in a sleeping bag just to get a deal in a big new 2bd 2ba elevator doorman etc.
WHICH IS WHY i think it can’t happen. people talk about “worst case scenarios”, but any thing that includes near-term prices dropping back to say, 2000 prices, would only result in a whole new feeding frenzy. imho.
11.21 raises a good point.
Even if you accept Coy’s numbers as accurate and indicative of all markets, there’s a very large leap that he’s taking (or, more aptly, a pitfall he’s not seeing). Simply because only 4% of homes may be affected by this is not to say that only 4% of the homes on the market will fall into this category. The percentage of homes which are for sale at any given time I’m not sure on, but I would guess it’s under 5%. If you assume that number to be more or less accurate, then adding on another 4% of the market in its entirety would severely depress prices as you’d be doubling the available housing.
Also, I would note that even the relatively rosy Harvard study is based on a relatively small sample. It’s only 1975-1999 and personally, I would be hesitant to draw strong conclusions out of that sprarse of a data collection given the long timelines that real estate shifts occur on. It also noted that the interest-only loans comprised 20% of the total dollar value of home loans last year, creating concern of long-term default problems.
Again – where is said that those reset are being reset at higher rates then paying now – and you also speculation that the ARMs have little equity. Any stats or pure conjecture?
Are todays fixed rates 6.7 approx – so different than 2 years ago (6.3).
Agree that all prices tied in – if condo prices drop other RE will as well
and they well might – but ARM as factor isn’t. Oversupply, rent vs own cost factor, any problems in economy yes but ARM is no go.
His spin (done with a fraction and an excel cell) is wild optimism based of shoddy thinking.
His argument that SINCE only 4% of owners will get reset over the next 12 months, means THAT the effect is insignificant, is a huge logical leap. If 4% of the market have little equity in a falling market, and then have to pay higher monthly mortgages, many will bail. market value is set by recent sales, not what percentage of people are sitting pretty.
I’m sure 80% of arm-les home owners would like to believe the value of their property is high and increasing but like it or not, for a while, it is gonna be determined, or highly influenced, by the ONE guy down the street with an ARM, and a fast pressured sale. And 4% of a neighborhood is a lot of these guys.
Even the ones in condos will influence things, the market isn’t protected silos, it is interconnected. If nice bright condos start popping up for 500 a square foot this winter, brownstone buyers WILL start to expect better values.