The interest only loan is back but in a very specific way. There are a few people with relatively high incomes that are using these to their advantage. I decided to run a quick test trial on this to see what it would cost to go with an interest only loan on a $1,000,000 home purchase. The answer might surprise many but it highlights the incredible leverage that low rates are providing to buyers. It also highlights how low rates favor large financial firms (i.e., hedge funds, etc) and those with high incomes. While the regular family might save a few hundred dollars a month they are still paying tens of thousands more on the sticker price. Combine that with the flood of big money into the market and you get the current housing market. What if I told you that you can get a $1,000,000 home for a $1,900 monthly payment? Not possible? Then we have the loan product for you.
A recent survey of potential home buyers found that many were willing to use unconventional purchasing methods. The term used was ‘aggressive’ buying tactics. Yet when we look at what was found is that people are willing to overbid and almost beg for buying a home. This has been the case for the last couple of years in California as regular home buyers compete with flippers, big investor money, and foreign buyers. The chorus of housing bulls has grown especially in the last year as flippers are now on late night television shows and flip-this home type shows are now filming on US location instead of using the hyper-Canadian housing market. What the survey found was that many were willing to overbid, borrow a down payment from loved ones, or eat up many of the seller’s costs in the process. This manic like behavior at a time when inventory is rising and some flippers are starting to see that buyers are unwilling (or unable) to pay whatever they wish may signal a turning point.
This week we had two interesting headlines converge. One had to do with home prices continuing to move up. In fact, four markets hit new record levels. These were mostly in Texas; Houston, Austin, Dallas, and Denver. Given the lower prices of Texas, this isn’t really a shock especially combining this with the record low mortgage rates courtesy of the Fed. At the same time, we find out that the home ownership rate continues to fall reaching a multi-decade low while rental vacancies slowly decline. All of this of course makes sense given a supply constrained market and a massive amount of investor buying over the last few years adding rental properties to the market (taking off market potential single-family homes for actual purchase). What is troubling about the data is the difficulty for first-time buyers to enter into this odd market. Having a larger share of our market as renters might make sense given economic constraints of household incomes yet it should be abundantly clear who the big winners were from all the Quantitative Easing that has occurred. Welcome to rental nation.
The amount of speculation occurring in the housing market is extremely high. Not to the levels of what was seen between 2005 and 2007 but it is certainly getting close. For example, the usage of adjustable rate mortgages is reaching multi-year highs. This is an odd choice unless you have a fanatical belief that home values will continue to go up or that the Fed has god-like powers to control the mortgage markets into eternity. Yet that perception is very real and perceptions drive a good amount of energy in the housing market. The logic of people using ARMs is very similar to what was used only a few years ago during the heyday of the housing bubble. Home prices are seen as never falling, income will only rise, and if everything goes off the financial cliff then you can simply refinance. It is interesting to witness this for a second go around but the surge in ARM usage is very telling especially in such a low rate environment.
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