Pumped up by the great power coming to real estate buyers through the Internet (last post)? Okay, time to sit down.
The BusinessWeek cover story this week is all about adjustable-rate mortgages, and the trouble in store for people whose homes are financed with them:
The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home — or so they thought. The option ARM’s low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.
The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out. What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.
Of course, with the real estate boom like the Internet boom before it, the very same magazines proclaiming gloom and doom today were touting easy riches and inevitable growth just a couple of years ago. The article is worth reading, but remember when you read it that the stories magazines put on the cover are the ones they know will sell copies, and like terrorism and stars’ love lives, encroaching economic doom sells.
(One of the things I’ve had the most trouble with in desiging Wesabe is how to resist manias. The Internet is great at pulling out “The Wisdom of Crowds” and figuring out what a consensus of people believe to be true. Manias, however, are by definition very widely-believed but short-lived. The stock market hammered Warren Buffett when he opted out of Internet stocks in 1998-99, but then lauded him in 2001 when the bubble had burst and he was still standing. Can you make an Internet application that would help people have that long-term view? I’m still not sure.)