Wednesday, December 21, 2005

Risky Financing: Percentage of U.S. and Washington area borrowers who purchased or refinanced their homes with interest-only loans:


  1. Seeing something like that makes you think "that's the whole story."

    2000... no housing bubble. 2005... massive housing bubble, with DC racing ahead of the national average.

    I see lots of reasons for this bubble, including a lot of defects in modern American culture, such as the "me first," "forget the future," "don't worry about tradition" mentality. And the atrocious job the media has done (pumping until after the peak) hasn't helped.

    But this chart makes me think that none of the bubble would have been possible without I/O loans.

  2. Dave,

    Where's this data from? The 38% in mid-2005 looks a bit low to me. Here's quote from a recent WaPo article:

    "In 2000, only 1 percent of Americans who got new loans selected the interest-only variety, but by midyear 2005, about 23 percent of borrowers were using them. In fact, a greater proportion of buyers used them in the District than in any state, according to LoanPerformance Inc., which reported that in the first half of 2005, 54.3 percent of all D.C. home purchasers used interest-only loans."

    Not clear here whether the LoanPerformance number here includes refinances, which could explain the difference, but could be different data. Do you know what's driving the difference?

  3. this was from Washington Post article

  4. How much do you blame Greenspan for the insane Credit expansion that's occurred over the last 18 years?

  5. the difference between the 53% statistic and the 38% statistic is that the 53% stat applies only to the District of Columbia, while the 38% is for the DC metro area as a whole (including the burbs in VA and MD)

  6. Someone is signing a mortage with 400k+ and little down and think thing they are relatively safe because housing always goes up.

    Well if that 400k becomes 200k don't ask for tax payers to bail them out. The US constitution doesn't say anthing about protecting people from making stupid financial decisions

  7. It depends--I have a 30 yr fixed rate interest only loan which gives me flexibility. Right now I am paying more than the regular fixed rate monthly payment would be which allows me to bring the interest down. These are only bad if you pay the minimum and if they are ARM.

  8. Tom:
    I hate to say it, but under your scenario (50% drop in home value), a government bail out is almost a given. I hate to think about our tax money going to subsidize the idiocy of bubble buyers, but if the coming crash causes a 50% drop, a lot of rich people who contribute substantial sums of money to congress (not to mention the congressmen themselves) will be screaming for legislative relief. No one, including elected officials who own their own homes, wants to see the value of their biggest asset diminish that much. Of course, it won't take that big of a drop to kill off many of the speculators and 100% financing folks who bought in 2004 & 2005. A mere stagnation will do the trick.

    For the record, I predict a steady decline in home values throughout 2006-2008 (topping out at 30% or so in the biggest bubble markets), with a leveling off in depreciation occurring in mid-2009. That said, I cannot even guess when homes in bubble markets might actually start to trend upward after the crash. The stagnation (after the crash) could last well into the 2010s in the bubble markets.