mephisto, people like you, who are choosing to get an I/O loan, are the ones these products were originally made for. The problem is that 80% of San Diego mortgages last year were some kind of unconventional loan, many made with stated income. Most of these, I would say over 75% of these loans, were made to stretch into a house, because the buyer thought his house would keep appreciating. Why am I so sure? Because the median family income in San Diego is $51K/year. Since the median house is $500K, that is a multiplier of 10! The usual multiplier is 3-3.5.
When I bought a house in 1987, and in 1997, the general rule was we could get a mortgage for 3-3.5x income.
Now people are qualified on the basis of teaser rates, not the fully adjusted rate, and they can *state* their income. This easy lending has led to escalating home prices, as more and more people rushed in to buy homes.
The housing bubble got so much bigger this time due to this exotic lending. For this reason, you see home prices weakening nationwide. I don’t know if we have ever had nationwide home price declines and overbuilding since the depression.
So while there may be a few people here and there sitting around with cash, they are not the median San Diegan.
We cannot plan the future of the housing market around 2% of the population.
I do like your argument though, mephisto. It would make sense if there were indeed many people like you describe. But the data just doesn’t support it. If you look at credit, MEW, and wages, the picture paints a wage earner whose income is stagnant and who makes ends meet with credit.
The banker associations and government agencies are concerned about the effect of $2 trillion of mortgages resetting over the next 2 years.
Whether 1% of the population, the wealthy, can still pay cash for a mansion in Rancho Santa Fe, does not affect any of this one bit. The wealthy are in a different league, and their housing market in the +$3 mil category march to a different drummer. Stock market gains, option grants, all that kind of stuff.
To understand where the market is going, we have to look at the masses. The economy leading indicator is wages, and the wages of the masses is what is causing this all to unwind.
Just out of curiosity, how did your friends come across their riches? And to round out this discussion, for anyone reading this,
1) how many people told you they have money sitting in the bank to buy a house, and
2) how many do you know who already own a home, so they would not buy regardless of how much money they have saved
3) how many people have adjusting loans without an adjusting income to match (but they will *never* tell you; I bet not even your dearest friends would confess to such a shameful thing)
I’ll go first: I know only 1 other family with cash ready to buy and know several renters who are undecided about what to do; I could name 100 people who own; and I have no clue how many of my acquaintances have ARMs. I talk to a lot of people, since I am kind of a social butterfly, and my experience is very different from mephisto’s, both anecdotally and in the stuff I read every day.
But I am fascinated to hear more about your view, mephisto, that a large group of people sits ready with cash to bail out a housing decline. Please ask those people why they would buy while prices are dropping. Why wouldn’t they wait until prices *stopped* dropping, just to be safe?
