California Falling Out of Love with Adjustable Rate Mortgages

California real estate has exploded over the last 5 years causing a wealth effect to spread to other parts of the country like Las Vegas, Phoenix and now San Antonio.

Part of this dramatic increase in property prices may be tied to increasing use creative mortgage loans such as interest only mortgages, pay-option ARMS and hybrid ARMS.

Facts:

- 2002 only 2% of mortgages where interest only... in Feb 2005 it was 61%.

- Adjustable loans represented only 28.9% of the market in 2002 and jumped to as high as 73.7% in May of 2005.

This increase use in these types of loans increases the amount of a home someone can afford to purchase, which pushes up home prices... or is it just luck that the biggest jump in prices coincides with the dramatic increase of adjustable rate mortgages?

Now, Californians are falling out of love with these mortgages according the Dataquick press release.

What's interesting when you read this press release...

Peak usage during the prior real estate cycle was in September 1988 when ARMs accounted for 66.1 percent of all home purchase loans

What happened next... Southern California real estate prices dropped 20 or more and took 5 years to recover.

Will this cause home prices to start decreasing? Share your thoughts as to the impact of the decreased use of ARMS on the California real estate market.


*Data & Chart provided by: Dataquick

California Real Estate Overvalued?

Today, CNN Money released it report on over-valued real estate. Unfortunately many parts of California ended up on the list.

What do you think? Are we over-valued and will prices come down?

Mortgage Rates Highest in 2 1/2 Years... What Happens to California Real Estate Now?

Mortgage rates have been creeping up slowly and are now at the highest leveles since the summer of 2003. Here is some mortgage rate data from Freddie Mac to review. Part of the increases in mortgage rates is the fear of inflation and the rising yields on the 10yr and 30yr treasury bonds to which mortgage rates have a loose relationship with.

As I have mentioned and charted on a previous post, there is an inverted relationship between mortgage rates and real estate prices.

If mortgage rates continue to increase, real estate prices will come down. Here is a very simplistic overview of the impact of mortgage rates and home prices:

$500,000 loan interest only at 5.5% = $2520.83
Income needed to qualify based on 28% income to debt ratio*: $9,002

$500,000 loan, 30 yr fully amortized 5.5% = $2,838.95
Income needed to qualify based on 28% income to debt ratio*: $10,135

$500,000 loan, 30 yr fully amortized 6.5% = $3,160.34
Income needed to qualify based on 28% income to debt ratio*: $11,285

So assuming someone was looking at real estate and their income is $9,002 and they were originally looking at a $500,000 loan to buy a home, now mortgage rates are up and using the same income to debt ratio this person now only qualifies for a 30 year fully amortized mortgage at 6.5% for the amount of: $398,734.

That is over a 20% difference less in loan amount that this same buyer now qualifies for.

What do you feel a home buyer facing this situation will do? Stop looking? Get creative financing? Stretch themselves?

Give us your feedback as to what the impact will most likely be.