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Special Report:Reshaping the Mortgage Markets
So much has been speculated about the predicted rise in short term interest rates and their long term effect on the housing market, it is difficult to make sense of what is really happening.
Over the last ten years, the long term interest rates for thirty year mortgages have averaged 7.3%. Fears are rising among those who hesitated or are coming late to the game that the historic low rates we have just witnessed are never coming back. Those fears are well founded as most economist expect rates to reach some sort of historic average in the near future. The lowest rate available in the '90s was just shy of 6.9%.
The major difference between then and now is the effect of adjustable rate mortgages. Where they once had little effect on the housing market, these types of loans now comprise a full third of the outstanding home debt. These homeowners could be facing some difficult times ahead as the belief that low rates continuing for the near future dissipate in tandem with the low overnight rate. (It is important to note that the short term interest rate that the Federal Reserve Bank sets has little effect on mortgage rates.)
Alan Greenspan, the nation's top banker voiced his concern earlier this year about the effect of this type of debt, especially on those who have borrowed on slim margins. A slim margin exists when the amount of money borrowed is dangerously close to the amount of available cash the homeowner has available to cover any increases in mortgage payments. Owners of Adjustable Rate Mortgages (ARMs) will face rising monthly payments as a result of higher rates. This could increase the amount of defaults the mortgage industry will experience, which have already risen at an alarming rate.
This could be good news for those that have waited. While some people cash out their equity, take profits, and move on; others will find housing prices falling somewhat offsetting and small increase in interest rates. Also adding to this offset is the predicted rise in job security and the wage increases that often follow.
But those using ARMs will take a good deal of the housing debt into bankruptcy court. Significant increases in personal bankruptcy filings, a lagging and often ignored economic indicator, has begun to play a role in the lives of a good deal of homeowners who borrowed cheap and spent extravagantly.
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