Don't know where you live but in SoCal it's not that easy. Still doesn't help the situation. Even a 4% mortgage won't help the majority that couldn't afford the home without the 1-2% teaser rates. The one and two year old home note that were sold with crazy teaser rates, now adjusting and can't be refinanced out here in SoCal are going to kill the market. What a mortgage broker could offer today in a fixed, won't help if you can't afford the monthly payments. Doesn't matter if fixed is less than arm... neither is affordable to the F'ed Borrower. Newsflash.... buyers bought homes they couldn't afford. Hoped appreciation would help them weasal their way out of the IO/ARM that helped them buy more than they could afford in the first place. The party is over.
Thats incorrect. The gap between fixed and ARM was much wider earlier, and ARMS were much lower. People got ARMS as low as 3.3%. A 30 year fixed is 5.69% today. Thats a massive difference in mortgage payment.
Given your interest rate numbers the precise difference in monthly payments on a $500K mortgage is: $696.34/month. For a $250K mortgage the monthly difference is: $345.67. That is the financial gap that needs to be overcome. Most people living in that more expensive $500K home are in an upper class tier most likely with 2 wage earners. That means each spouse would only have to earn a difference of $348/month more to get to the same level (assuming no adjustments in life style or debt or discretionary expense reductions). That gap is well within the normal expectation of a normal job salary increase for this class of people. It's even more reachable if they reduce discretionary expenses and adjust lifestyle slightly. Given today's demographic the lower tier people in the $250K mortgage home are also likely to be dual wage earners. That means between both spouses they only need to make up a difference in salary (or monthly expense reduction) of $173. Again that is well within normal salary expansion expectation over a 2 year period as well as within the expected supplemental income that this demographic usually makes through tax free private transactions. But, lets talk about what really probably is happening with your "average Joe". In both cases with a fixed rate mortgage it is often extremely easy to get an integrated 2nd mortgage product or a home equity loan using the generous property appraisal levels at their peak valuations. This equity inflation is cash that the owners can strip from future-equity to buy time in anticipation of a return to higher appreciation rate times. Yeah, it metaphorically equivalent to self-cannibalism. Many owners will take this gamble and it may prove to be unwise for many. Other more sensible owners will refinance at a 40 year mortgage to give themselves a lot more cushion for time to permit the excess inventory to be reabsorbed by normal population growth rates (300 million and growing fast through immigration here in the ol US). That means all these people need to do is sit tight and wait for demand to outstrip supply and for prices to escalate up again. That is the scenario I am projecting. At a 40 year mortgage the gap on the $500K mortgage is only $438/month. On the $250K mortgage the gap is only $214/month. Both of these differences in payments between the old ARM teaser rates and new 40 year fixed rates are well within a combination of salary increases as well as discretionary spending reductions. The bottom line - Chicken Little got hit by a moving truck while crossing the road to live on the other side and life is still very good. Already my broker phone call volume is picking up greatley. I anticipate that in 6-9 months our market will be back very close to a balanced buyer-seller market. Right now we already have it in the lower tier homes. It will take a bit longer for luxury homes. Overall prices should begin to rise again in 11-14 months. Then another wave of selling will take place by those who gutted it out on home equity loans or family cookie jar loans & inheritances (another huge expectation given today's demographic). Then the market will cycle to a buyer's market for another year at various places in the country. Then new construction will kick in and hold prices in check to about a 3-5% growth rate for 2-3 more years until we get into a global commodity war. Then its through the roof again. After that its any-one's guess. But in our area the demographic projections of 500K new people moving here per year plus re migration of southern FL away from congestion and crime to my area here in central FL makes us ripe for explosive price appreciation since its a terrific lifestyle that can't be had too many other places. In fact the Orlando market is on fire right now with super hot sells. So the bottom line here is that there is no national market and parts of this country will explode with growth as populations migrate. Others will tank. Moral of the story - buy the biggest house on the biggest lot or waterfront now at discounted prices while you still can (in the good national areas). Because barring a world calamity these cheap value days will never be here ever again and prices can only escalate. If wages can't keep pace with housing costs then 40 year mortgages will become the norm or people will pay a premium to live on lower cost rentals. There may also be equity participation and partnering loans and creative financing that will once again become popular. There is a huge amount of global equity in circulation and eventually it will find its way back to the most discounted markets. Right now its stocks. But soon it will be commodities and homes again. TS
Many people who bought in the past few years can just barely make payments on the ARM's they got. ANY increase in payments will crush them. This is precisely why foreclosures are increasing at such a dramatic rate. A record number of ARM's reset this year. I agree with crackedback, the party's over. 2007 is going to be ugly in really expensive/ over built markets such as S Cal. Add a possible recession to the mix down the road, and prices will come off big. We need to get back to the mortgage/income ratio which has been stable for decades. It was at roughly one third of income going to living expenses. Now its one half.
cme housing futures expecting 6% drop nation wide by sept, don't know how legit that is since its pretty thin but i think 4-5% is reasonable
Given the national context this is exceptional. The national average I believe is closer to 221 - 284 days. TS