April 06, 2004

when the bubble bursts

After reading posts like this on Apartment 11D, Iíve realized that, duh, Los Angeles isnít the only huge urban center thatís still in the midst of an absurdly inflated real estate boom. And this article in The Washington Monthly (link via Scalzi) confirms it: New York, Boston, San Francisco, Seattle, Los AngelesÖ prices are out of control. The question that still hasnít been answered anywhere: is this a bubble? Will it burst or keep going up and up and up until only millionaires will be able to afford even one room shacks and everyone else will be relegated to rentals? But if it bursts, what then? It sounds so simple: wait until prices settle, buy then. But if prices go down, thereís one reason for it: rising interest rates. Which means youíll have the same outrageous monthly mortgage payment, only more of it will go toward interest and less toward principal.

So what, right? At least itís no worse and maybe itís better, because less money is, after all, less money. Easier to come up with a down payment, easier to handle things like property taxes, which are proportionate to the cost of the house. But thatís looking at the micro, the individual. You. Not the bigger picture. The us, as it were. And the us here is about to be in big trouble. We went to see our tax guy for our yearly appointment two weeks ago. He said heís making sure he refinances his house to lock down a fixed rate before November. Because he Ė along with everyone else Ė says rates are not going to rise before the election. But after? Well, nobody knows for sure, but itís been artificially low for so long, yeah, probably so.

Hereís the thing. I read an article in the LA Times shortly after the one I linked to. This one was about how people are managing to buy those overpriced houses. How? Theyíre grabbing the lowest interest rate around, a/k/a adjustable rate mortgages. They're taking zero down mortgages. They're playing with numbers and praying it all works out, that rates stay low and prices keep going up. I'm not one to judge. We did it ourselves three years ago. Zero down, the whole deal. And we got lucky.

But for these people? What if the market really is at the top now? I can't see it going much higher and I can easily see interest rates soaring, and soon. These people can just barely afford the payments on those $700K thousand square foot bungalows as it is. Whatís going to happen when those payments balloon? They say rates go up faster than they go down. What happens when your bill goes up by fifty percent and your property value simultaneously plummets? It means your equity floats away on the wind so you canít even recoup if you sell and you certainly canít obtain a credit line Ė and even if you could, how would you pay it?

Add to that the huge numbers of folk who have refinanced to take money out of their houses, to cash it in while the cashing's good, and who therefore also probably now have ARMs instead of fixed rates and who have bigger monthly payments because that extra money they took out? Not free. And then rates go up and they too are underwater with minus equity because they spent it already in the expectation of continually rising prices. What happens to those people?

What happens is foreclosures here, there and everywhere. What happens is an economy even more in the toilet. What happens is ugly. We moved to LA a month before the Writers Guild went on strike. The strike lasted months, delayed the TV season, scuttled dozens of film shoots. People foreclosed, people went bankrupt. And not just in the film business. Restaurateurs. Hairdressers. Accountants. There's a ripple effect when large groups of people who are used to having -- and spending -- money don't and can't anymore. Imagine that on a national scale, and no strike settlement on the horizon to fix the problem this time.

Scary stuff. Weíre refinancing this month, locking in a fixed rate mortgage. I want to sleep at night, yíknow?

Posted by Tamar at April 6, 2004 10:01 PM