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Mortgage trend poses risks in downturn

My blog might just have to become a “bubble-free” blog if I have to keep reading stories like this one, that appeared in today’s Boston Globe.

The issue I have isn’t that people are talking about inflated housing prices.  It’s that the data they are using to support their argument is flawed.

In this article, the author starts out with a very shocking statistic: “To afford Greater Boston’s soaring home prices, one in four homebuyers last year took out a risky, interest-only mortgage that offers lower monthly payments…”

The statistic appears to be true.  Well, the statistic that one in four homebuyers took out an interest-only mortgage.  However, to add that part at the beginning, “(t)o afford Greater Boston’s soaring home prices” is where I lose my patience.

Nowhere in the article is there anything to support the reporter’s statement.  She gives as examples two home-buyers.

However, the first one, a guy buying in the South End, says the interest-only loan “‘does allow me to buy more house.”  Notice, he doesn’t say, “I couldn’t afford to buy anything unless I used an interest-only loan.” In fact, he only bought his last condo three years ago, and is now trading up (the public record shows he bought in 2002).  Not a good example of someone suffering from the high price of Boston’s real estate.

The other homebuyer ISN’T EVEN USING AN INTEREST-ONLY LOAN – they have an adjustable rate mortgage.  The author couldn’t even find two people to support her argument.

There are some great stories out there about real estate.  Unfortunately, this isn’t one of them.  I have yet to see many that are helpful or that are relevant.

By Kimberly Blanton, Boston Globe

 

To afford Greater Boston’s soaring home prices, one in four homebuyers last year took out a risky, interest-only mortgage that offers lower monthly payments in the initial years of the loan but raises payments sharply in later years.

In 2002, just 5 percent of new mortgages in the Boston area were interest-only, according to LoanPerformance, a San Francisco firm that tracks the housing market.

Housing specialists say the growing dependence on these loans could spell trouble for the housing market if interest rates rise and house prices stagnate or fall, and large numbers of homeowners are unable to pay their mortgage bills. If they can’t and decide to sell, a glut in the market would send prices spiraling downward.

”If the only way that new buyers or people trading up can afford to do so is by taking out interest-only loans, they’ve hit the ceiling in terms of affordability,” said David Stiff, an economist for Fiserv CSW Inc. in Boston, a real estate research firm. Tough times, he said, ”will dry up [housing] demand very quickly, because people are already tapped out.”

Complete article: Mortgage trend poses risks in downturn

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