Monday, April 03, 2006

First Sign of Housing Market Grenading

This article and signs such as rates raising fast and people starting to forclose have been the signs I have been watching for to determine when to start thinking about selling.

The way housing prices have sky rocketed in Northern Virginy in the past five years, particularly since 03, I've suspected that a lot of people in the area have gotten interest-only loans. In 2000 that would have been an awesome thing to do. You basically are banking on the value of your house increasing so you can sell it since you are not paying any money towards the principal. As a result, the only way to increase equity is for the house to value up. The other gotcha is that these interest-only loans are always an ARM.

So what happens when you get an interest-only loan because it is the only way you can move into an expensive neighborhood like you find in NoVa and the interest rates start to climb? What happens when they climb to the point that you can't pay them anymore? Well, you sell your house and get out of dodge to a lower priced area. But what if you can't sell your house for more than you paid for it anymore? Ahh, that is when the foreclosures start and the housing values start to drop, creating more forclosures.

This is the first sign of that process. Hopefully it will just be a market adjustment and highly inflated areas like mine aren't going to crash. If it's an adjustment and the prices level out or even drop a bit, that's not too big of a deal. It really all depends on what happens with all those interest-only loans and the interest rates to determine how bad the cycle will be.

Holding my breath...

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