The subprime and nontraditional mortgages account for nearly half of all mortgages. A lot of these loans can go bad quickly, once the Federal Reserve raises interest rates. An anecdote from the New York Times article that came with the chart above illustrates the precarious financial conditions of many homebuyers:
For years, Ray and Shahrazad Daneshi sought to buy a home, only to be told that they did not earn enough to qualify for a mortgage. But they recently managed to buy a small house in the shadow of Disneyland for $360,000 - six times their annual income - thanks to a lender who allowed them to borrow the entire value of the home, with no down payment.See, also, Blanche Evans, "Why Rising Interest Rates Will Hammer Housing" (Realty Times, June 23, 2004) and "The Perfect Real Estate Storm" (Reality Times, June 24, 2004).
"We will not be going to any movies or eating out at restaurants," said Mr. Daneshi, a self-employed wedding photographer who came here from Iran in 1988. "But in two years, the house will be worth a lot more and we will have something to show for it."
The Daneshis' purchase underscores the new, ever-optimistic economics of home buying. A kaleidoscopic array of mortgages for people with little cash or overstretched budgets has enabled families of modest income to take on debt that once would have been beyond their reach. As long as new home buyers could count on rock-bottom interest rates and housing values were going nowhere but up, this seemed to be a virtuous circle.
But now, with the Federal Reserve expected to embark on a series of interest rate increases starting with its meeting on June 30, some experts worry that recent first-time buyers could find easy home ownership a lot harder on their wallets, possibly causing housing prices to wobble in some high-price markets.
With the Daneshis, for example, rising interest rates on the two adjustable-rate mortgages they took out to buy their house would mean that their monthly payment of $2,500 - already more half their monthly income - could go up substantially in two years. Mr. Daneshi realizes that, but is unconcerned.
"Why worry?" he said, adding that he believes rising home prices will help him obtain a better loan deal by then.With interest rates going up, that may be wishful thinking. Most analysts agree that there is no nationwide housing bubble because housing prices have climbed only slowly in the Midwest and the South, even as they have soared on the East and West Coasts. Still, if rising interest rates cause housing prices to drop, even slightly, industry officials warn that some new buyers will have no equity in their homes and could choose to walk away from their loans if they run into trouble with payments.
"A lot of these loans are dangerous," said Allen Jackson, manager of Bristol Home Loan in Bellflower, Calif., a mortgage broker who specializes in so-called subprime loans, which charge higher interest rates to people unable to qualify for traditional mortgages. "If you have any dip in values, people can just say the heck with it because they don't have any of their own money in the house." (Edmund L. Andrews, "The Ever More Graspable, and Risky, American Dream," June 24, 2004)