@asianautica
I understand the 2nd hump. But I’m pretty sure the people in the first and 2nd hump buy in different area. That is how I explain move up areas lagging way behind entry level areas.

I disagree. There is a time lag between the two ‘humps’ on resets. The difference is when it was originated. If you look at Fed rates during the period, the Option-ARMs were done when the Fed rates were higher. I think the lagging on ‘move-up’ areas is due to buyers having a bit more equity when they bought in (not that they have it now) and a stronger belief that the area never goes down. I need to dig through my computer files.. I think I have a more recent graph than that one. It showed the first ‘hump’ shrinking, but the second ‘hump’ getting bigger. I suspect people ref’ing out of more ‘standard’ loan products into Option-ARMs.

@tomato — read the bubble primer!! Pure economics is important because it addresses the ability to afford(as opposed to financial gambling) the house. Option-ARMs are last ditch trying to get in.. and if need be get out before things go south. When they become widely used, get the heck out of dodge because the drop will be rapid. BTW: in addition to sd_bear’s comments: Emotions also have an effect on the way down (I don’t want to buy into a house when I can get it cheaper next year!!). It displays itself as ‘momentum’ in the prices and causes ‘overshoot’ and temporary market inequities. (ref efficient market theory)

You are now stuck firmly between both zones.
Humm.. If you bought a house for $35k in 1970, it would be worth about $600k (market peak) on the high end.. for an average appreciation of 7.7% per year compounded. If I bought BRKA on Nov 11, 1976 after doing nothing with the money for 7 years, I would have $64,410,447.. makes you go humm.. So what do you think I am doing with my money right now?? If you just took the 20% down of $7,000 in 1970.. did nothing for almost 7 years and then bought BRKA.. you would have $12,882,089.