Some homeowners struggle to keep up with adjustable rates

[On the Road]

--snip

America's five-year real estate boom was fueled partly by a tempting array of cut-rate mortgages that helped millions of Americans qualify for home or refinance loans. To afford soaring home prices, many turned to adjustable-rate and other, riskier loans with low initial payments. The homeownership rate hit a record 70%.

Now, the real estate market is cooling, interest rates are rising and tens of thousands more Americans are starting to have trouble paying their mortgages. Nearly 25% of mortgages - 10 million - carry adjustable interest rates. And most of them went to people with subpar credit ratings who accepted higher interest rates, according to the Mortgage Bankers Association.


"Within the last year, I would say 60% to 70% of calls to our hotlines are issues related to ARM (adjustable-rate mortgage) loans," says Chris Krehmeyer, executive director of Beyond Housing, a non-profit group that offers homeownership support services in St. Louis. "That's significantly higher than in years past, because the ARMs are coming home to roost."

Last week, the Federal Reserve raised interest rates for the 15th time since June 2004 and signaled that at least one more increase is likely. That trend is ominous for borrowers who were seduced by adjustable-rate loans that offered interest-only payment options or teaser rates below 2% or that let the borrower pay less than the interest owed. They will face bigger payment shock once their loans reset to higher rates.

http://news.yahoo.com/s/usatoday/20060403/bs_usatoday/somehomeownersstruggletokeepupwithadjustablerates

Now is not a bad time to get an ARM. I can't understand people who did it four years ago. And I can't believe mortgage companies who encouraged that option for buyers who were already overreaching. It was absolutely immoral.

The upside is that there should be some good deals in the next couple of years, especially if you want to buy a foreclosure.

[seriousstan]

1. Anyone who would accept an ARM will furnish from Rent To Own.

Fools

[MercutioATC]

2. Agreed

Lock in at the lowest rate you can get. If the payment's too high, you can't afford the house.

[phantom power]

4. In this case, it was a re-fi to pay off bills.

Still foolish, but you can see how people get trapped. They get desperate, and some con-artist at a mortage company tells them exactly what they are desperate to hear.

Those fucking ARMs and interest-only mortages should never have been legal in the first place. Anybody could predict they were a recipe for disaster. And here comes the disaster.

[On the Road]

5. I Took Out an ARM to Pay Bills

but in my case it was a small equity loan -- the alternative was a 9.75% fixed rate, because it's on a rental property (and it's mostly paying costs from the rental property). Still, the monthly payment went up from $150 to $200 overnight. Very scary -- I didn't expect the increase to be that big, and, and I can't imagine having an entire mortgage like that.

[phantom power]

3. Their rate rose to 10.5%. So far. Here it comes...

[Warpy]

6. You think ARMs are bad? Wait until the rate on those interest only

mortgages starts to balloon. The market isn't relying on the bigger fool theory any more, and dumping the house for enough profit to put a real down payment on the next one is not a realistic ambition.

There are foreclosures on nearly every block in my neighborhood and this isn't an area that was prone to fancy financing arrangements on speculation. I can only imagine that they represent mortgages like ARMs that were oversold to people who only marginally qualified.

[fasttense]

7. There are foreclosures on nearly every block in my neighborhood

Sounds like the 1930s. Oh wait, that can't be. The 1930s was during the Great Depression and the economy now is simply wonderful, just ask Exxon.

Are US consumer running out of borrowing schemes to keep buying cheap products from third world Nations?

[dcfirefighter]

8. I don't own, this will help me.

pardon me for finding comfort in other people's problems. But that's the way of the economic system. My desire to buy cheap and other's desire for home appreciation are mutually exclusive. Perhaps we should stop looking at homes (more specifically, land) as investments and start looking at them as places to live. The home never appreciates: it gets old and requires upkeep. The lot appreciates, whether you keep it vacant, let the building fall apart, or build a jewel of a home.

[Warpy]

9. Do prices need to fall or wages need to rise?

IMO, the housing and health care markets are showing us what the real rate of inflation in this country has been since they're the only things produced 100% here. We've been bamboozled into thinking there's "no" inflation for years because we've offshored whole industries to keep those prices flat, and that's allowed employers to keep wages flat.

Now the bill is coming due. We have a majority of people in this country who can't afford two of the necessities of life: shelter and health care.

[dcfirefighter]

10. Now, if wages rise, prices follow, at least in Real Estate

Anything that can be built, generally gets cheaper. Property lots can't be built. They are collectibles.

To maximize wages, maximize employment. To maximize employment, remove taxes on productivy: Eliminate taxes on wages, sales, built property, dividends, etc. To maximize employment, ensure efficient use of Land (natural resources) by public collecting the rents that accrue to the ownership of land.

IOW: pay for what you take, not what you make.

Building a factory isn't 'taking'; occupying 2.3 acres near a highway and rail interchange is.
Providing 1000 MW of electricity isn't 'taking'; emitting 8 million tons of CO2 and having a monopoly distribution privilege are.
Refining oil into gasoline isn't 'taking'; pulling it out of the ground is.

Land + Labor + Capital => Wealth
in return
Capital recieves Interest, in the form of interest, dividends, growth, etc.
Labor receives Wages, in the form of wages, salary, benefits
Land receives Rent, in the form of rent, appreciation

The Rent must be paid; the supply of Land is fixed; collecting the Rent publicly merely diverts it from the Land-Lord to the tax collector.

Using less Land means using more Labor and Capital.
Using more Capital, but less Land, measn using more Labor.
Using more Labor means full employment and high wages.

Publicly collecting Rent means that there's no value in land speculation. Here's an article on how publicly collecting rent leads to affordable housing: http://www.newcolonist.com/tworate.html

[Warpy]

11. Are you absolutely sure about that?

Remember, the inflation we saw in the 70s wasn't due to rising wages and it's not due to rising wages now, although the right and their heavily endowed economics departments in universities would like you to think so.

Runaway inflation in the 70s was spurred by the OPEC oil shocks. They tripled the price and turned off the tap. Increasing energy prices went all through the economy, predicatbly so. Unions got blamed for insisting on enough wages to support a family, predictably so. Prices rose and wages have never recovered to their purchasing power in the late 1960s. Never.

Think about that.

Now we have decades of inflation in housing and health care and still no rise in wages. The theory that working people cause inflation because they're paid too much should have had a stake driven into its blackened raisin of a heart by now, but I see they're still pushing it in economics classes.

Inflation never went away, it was just masked by cheap foreign made goods and services. Wages never recovered. Now the price of oil has doubled again, so you're going to continue to see runaway inflation in this country, only now it will extend to everything we used to make but now import.

Labor, of course, will be blamed for it. Are y'all going to swallow that one again?

[dcfirefighter]

12. Let me clarify - i don't believe inflation is caused by wage increases

I believe inflation is caused by money supply increases.

But, that being said, if wages increase, if all the workers around successfully demand higher wages, if we had perfect solidarity, the owners of Land would simply charge more for it: Real Estate prices & rents would increase, oil prices would increase, Broadcast spectrum would increase, etc. The gains made by labor would largely be diverted to owners of land and resources.

The price of these resources is not based on cost of production, as they are not produced, but by what the market will bear. If, due to increased wages or by other means (cheap credit), the market can bear more, prices of these resources will increase.

Short run inflation can be caused by high energy prices, but in the medium to long run, high energy prices will be checked by alternatives, such as increases in energy efficiency and alternative energy sources. In concrete terms, if oil rises and stays at $100/bbl or even $1000/bbl, people will build more windmills, nuke plants, and solar collectors at the same time they reduce their use of transport, finished metals, and chemicals. It's not the price of energy that does it, it's the rate of change.

Looking another way, if work isn't being done by oil, because it's too expensive, perhaps it will be done by the brains and brawn of people. Instead of burning $1M of oil in a $1K machine, we'll 'burn' $0 worth of sunlight in a $1M machine. Rather than paying $1M for oil, mostly to the company with the title to the oilfield, we'd pay $1M to the engineers and machinists who made the machine.

If I were the all powerful benevolent dictator (APBD) of a country facing 70's style 'stagflation', I would:
Restrict money creation to the government by increasing the reserve requirement to 100%.
I would shift all taxation off of wages & income and on to resource occupation (Rents, according to Smith & Marx)
I would spend into existence money with the purpose of providing the most good to the most people, probably through a demogrant. Such money would have value in that it could be used to pay taxes. Because there would such widespread demand for such money (in order to pay taxes) it would likely be accepted for commerce by anyone connected to the US economy (everyone on the planet).

Of course, I'd do these things even if we weren't facing stagflation.

[Warpy]

13. The owners of land only charge the going rate

and that is something that has presently been bid up by speculators, so the pressure is deflationary no matter what happens to wages.

Wages always follow inflationary pressure and have never caught up to it in my lifetime.

Deflationary periods aren't characterized by falling wages. They are characterized by unemployment. Prices fall only because unemployment has destroyed the consumer base and sacrifice sales are done to salvage something out of the wreckage. What we are in grave danger of is entering into a cycle where deflation of this type is a real risk due to massive unemployment and underemployment.

Make me a dictator and you'll see a hike in the minimum wage and punitive tariffs against any company that offshores jobs but expects the goods and services to be sold here, assessed according to the percentage of the company's gross that reflects US sales. Also see tax incentives for anyone restarting necessary industries here in the US, big tax incentives.

You'll also see a certain five sided building in DC go on a strict diet.

[dcfirefighter]

14. Yes, but they recieve this charge without production

E.g. If I buy a GM car, I'm paying for it's production. If I buy a city lot, I'm paying the last guy in the (very expensive) chain letter. If I buy a city lot, I'm paying for all the value created by the nearby shops, jobs, businesses, streets, parks, theatres, stations, etc., BUT I'm not paying it to those people, I'm paying it to one guy.

I'm not sure what deflationary pressure you're writing about. Adding annual taxes to land values would lower sales prices of land, but of nothing else. Furthermore, collecting the capitalized value as an annual rental payment removes the incentive to speculatively hold land - freeing up valueable land for development, and generally lowering rental values. The net effect would be to develop underdeveloped private land in urban areas, reducing need to sprawl into the countryside. It also captures the value of public investment, especially from geographically constrained public goods such as transit, schools, utilities, and public safety.

In order to increase wages, you have to increase the demand for labor or reduce the supply of it.

I wish to increase the demand for labor by:

1) removing the tax wedge between take home pay and employer's costs. This doesnt just directly allow employees to take home more money, but also reduces the cost of employing the next, new employee. The net effect is a combination of more employment and higher wages. This would require eliminating the payroll tax, and most of the personal income tax.
2) removing the tax wege between take home earnings and investment cost for PRODUCTIVE, LABOR-CREATED Capital. If the tax on buildings is reduces, more buildings will be built, and more masons, carpenters, and other trades will be employed. This goes not just for buildings, but for refineries, factories, offices, reactors, shipyards, orchards, hospitals, etc. In other words, taxes on LABOR-CREATED Capital are not-so-indirect taxes on Labor itself.
3) dropping all this lost revenue onto taxes on exploitation, pollution and occupation. The upshot of this would be that all titles and government-granted privileges (such as timber rights or broadcast rights) would be periodically auctioned - perhaps annually, perhaps for a longer period. I fully expect that such resources charges (including local land resource charges) could replace current government spending IF the other taxes are removed. I need the other taxes removed, because land values increase with increased productivity.
4) A special privilege case, is the ability of private banks to lend circulating money into existence through fractional reserve banking. Eliminating this special privilege could i) eliminate the Nat'l debt. ii) eliminate the payments on the nat'l debt ($300B/y) iii) generate public income ($300B/y) iv) give us a rock-solid non-inflationary monetary system.

Note that, under my system, a company (re)starting an industry would 1) be able to obtain land for less than it can now (reduced by eliminating speculation and by eliminating loan interest payments) 2) be able to build any labor-built capital without paying taxes on it or it's returns. 3) pay no taxes on anything but what they take or withold from others: stuff they generally would have to pay a greater amount for now, if they purchased it from an existing 'owner'.

Also, under my system, tariffs would generally be unneccessary. The taxes would be raised from Land and Resources within the US. The tax base could not be offshored. The elimination of taxes against productivity would mean that productive jobs would FLOCK to the US. The taxes / rents against resource use would ensure that the fixed resources of the US were used VERY EFFICIENTLY so as to provide for the maximum sustainable productivity, IOW a lot of jobs. I would include tariffs agaist countries that pollute our atmosphere (including Carbon) as well as against countries that have a worse GINI (distribution of wealth) index than us. As for protecting us industries - I promise we wouldn't need it. Individual companies might, such as sugar farmers, but in general, demand for labor would be high, and we'd have more than enough work to keep us busy. If the EU wants to subsidize Jetliners and sell them for less than it would cost us to built them, then so be it. Their loss is our gain. Boeing's stockholders might suffer, but it's skilled employees wouldn't

As for the 5 sided diet, you're absolutely right. As for it's location, it's actually across the river in Arlington County, VA, where the people have voting representation in Congress. Just for fun, I believe the US spends more on the military than the rest of the world combined. I personally would support a Swiss style military at $340/pp ($100B total).

There is no doubt that tariffs raise the price of domestic goods. If enacted as protective measures, they raise the price such that more expensive domestic production can be effective. However, this has the net effect of taxing the consumer, reducing the power he has to make other purchases - which keeps someone else from being employed supplying that purchase.

As for the minimum wage, I've no problem with raising it a bit, though I believe that a large raise is impossible to dictate through legislation. My best guess is that eliminating the payroll tax (15%) the personal income tax against wages (15%) state & local income taxes (7%) sales taxes (1%) as well as an increase in productivity from access to land and capital (15%) would raise average wages by at least 50%, while giving even the most marginal employee an opportunity to work. In addition to the massive raise in wages, the cost of housing would decrease (though it would densify), by as much as 30%

Furthermore, as a pie-in-the sky, if we could put the pentagon on a diet, and eliminate corporate welfare, and empower local communities to race to the top; we could drastically reduce federal spending. I suggest from $2,600B to $600B. Most of that difference would be recaptured in local rents. I've no doubt that such a reduction in spending could allow for the collection of more than $5,000B in government revenue. Leaving half that for State, Local, and Federal spending, the remainder could be returned as a demogrant (more than $8,000 a person, just for being part of society - since it's merely a redistribution of socially created wealth).

So, In my ideal country:
Median Household Income would be $64,000 (vs. $43,000)
PLUS demogrant (3x$8,000 = $24,000) total annual income $88,000

New home construction price = $150,000
New home lot price = ~$0 + ~$4,000 a year
as a percent of median family's income <25%

Discretionary median family income after housing: $66,000

[On the Road]

15. You Would Do WHAT??

Restrict money creation to the government by increasing the reserve requirement to 100%.

Monetarists advocate a conservative policy of steadily increasing the money supply by 3-4% a year. That is opposed by most liberal economists as being too tight and too insensitive to recessions. But there's something to be said for it, since the money supply is important and slow steady growth is better than boom and bust.

The reserve requirement on transaction deposits is currently 10%, meaning that banks lend about ten times the money they hold. A 100% reserve requirement would mean banks would be forced to simply stop extending business and commercial credit for the foreseeable future until 90% of their loans came due.

The money supply would plummet literally overnight. Economic activity would grind to a halt. You would have an immediate economic collapse of the type seen in Mexico, Argentina, South Korea, or Indonesia over the last 12 years, but on a much greater scale. Like all depressions, the rich (including foreigners) would scoop up assets at bargain prices while millions were being thrown into bankruptcy. Just like the busts of the Gilded Age, only brought about on purpose.

Don't believe this would happen? During the Great Depression, the money supply shrank by about a third. Your proposal would reduce it by about 90%. Milton Friedman and Paul Krugman, not to mention Karl Marx and John Maynard Keynes, would all join hands in whipping you with a wet noodle for proposing such a thing.

[dcfirefighter]

16. I would limit money creation to the US treasury

Yep, you got it right. But, I, of course left details out, most of which you brought up.

>Monetarists advocate a conservative policy of steadily increasing the money supply by 3-4% a year.
As do I. New money would be printed every year. It could be a fixed basis (3%) of supply, or it could be based on a price index, I haven't decided. Either way, it would be about $300B a year.

> A 100% reserve requirement would mean banks would be forced to simply stop extending business and commercial credit for the foreseeable future until 90% of their loans came due.
Exactly right. They currently loan money into existence. Unfortunately, they only loan enough into existence to pay the principal. Since nearly all money is created this way, who is creating the money to pay the interest?
If they'd like to make loans, they'd have to have assets to make those loans against. Loan orignators would become brokers, serving as intermediators between investors and borrowers. It's not a difficult concept. It's not the lack of fractional reserve loans that would send interest rates sky-high (if you could get a loan at all) it's the massive contraction of the money supply.

>The money supply would plummet literally overnight.
I'm counting on it, sort of. All that private bank-created money would dissappear (perhaps we woudn't do it overnight), and be REPLACED by newly printed fiat money. Roughly $8 Trillion I think. I belive that would nicely purchase all of our foreign & external debt, and very nearly account for all of our internal debt. Normally if you printed up all this new money, it'd be wildy inflationary, but since we're doing it at the same time we are destroying the bank-created money....

So, we eliminate a $300B a year debt service, gain $300B a year in seignorage, and socialize one of the privileges (money creation) currenlty held by an elite few. Sounds like a good day at the office to me.

[teryang]

17. Depreciation is killer on homes

Costs of heating/ac units and new rooves have doubled recently. Putting them in at this point really won't add any value to my home, only liquidity.

[Sammy Pepys]

18. Agreed.

I need prices to come down to be able to buy. So while it's going to suck for people who have bought within the l;ast couple of years and are attempting to sell, it might be a positive for me.

And frankly, if you bought with an adjustbale rate mortgage in the last few years, you set yourself up for this. Interest rates were at all time lows...where do you think they were going to go?