Will the $700k to $2m market see more downward pressure on prices?
I sure wish that increased savings and super low interest rates will mitigate the impending problem, but I fear a truly objective analysis suggests a really ugly outlook. By impending problem, I mean that the amount of “sub-prime” loans that re-set so far, are only a minority compared to the amount of alternative and prime loans that have not re-set yet. And by re-set, I mean when the interest rate on a loan switches to a variable rate (from an introductory rate). And by problem, I don’t mean that the rate is re-setting… I mean that the loan also switches to principal and interest (from interest only)… and not to a 30 year amortization, but a 25 year amortization, thereby making the payment go from “man I can’t believe my mortgage payment is this high and my value is this low” to… “my payment is going to cost HOW MUCH?”
I’m not attached to being right, and I hope I’m wrong… in fact let’s pray I’m wrong. But every rosy view we can muster includes at least some amount of wishful thinking, whereas the more pessimistic view is based on a simple harsh blueprint that we all just witnessed roll out in Rate Re-Set Part I.
Here’s how Part II looks to be shaping up:
It is true that the $700k to $2m homeowner crowd, as a group, does enjoy greater insulation (i.e. savings, education, discipline, opportunity, other resources, etc)… but they are also a sort of a giant, in that the bigger they come, the harder they fall.
For sure, some folks are watching this unfold and saving more like crazy. But here’s the deal: even if 90% of the crowd can bunker down, it just takes some marginal folks, say a hard working couple with a new baby, two jobs, two cars, credit cards, and escalating healthcare expenses. One loses a big account, the other gets their hours cut.
It is not the rate re-sets that pose a problem… but rather the loan re-sets from i/o to p&i… and not over 30yrs… but 25yrs. On and $800k loan, this equates to $1,245/mo higher payment… and that’s with rates being super low.
Imagine if the loan was $1.2m. Imagine if rates tick up.
We don’t have a socio-demographic problem. We have a math problem. And a disciplined savings plan is not going to protect high-end homeowners from watching their value get erased.
Because once a few marginal folks are forced to sell an asset, for which there is virtually no market… in a market where low rates do not exist for refi’s, where no attractive financing is available for purchases either, where there is little demand, in part because the rates on jumbos are high, and in part because folks are worried about their income stream trend and security… whose effect will, in turn, decrease discretionary spending further… which will put more pressure on the next level of marginal people to sell… while the neighbor who could afford making payments on their $900k loan but watch their value go down to $700k… Part II sucks.
The scariest thing about this whole mess is not that people don’t see this coming… its that they don’t see it coming because they don’t want to.
And way more than the “sub-primers” and way more than the “richest 1%’ers”… the upper middle class are the true stimulators of the economy. When their cash flow freezes… look out below.
Of course, home values will eventually come back up… in like 10 years or so… so if you plan on staying for the long haul, just make sure you are locked into a long-term loan, and don’t read the news. But if you’re not sure about weathering the storm… you may consider selling now, rather than risk trying to catch a falling knife later.