The problem is extremely high debt - income ratio

[hertopos]

I am not against any 'creative mortgage types'. What bothers me is the fact that many people are obtaining a loan that was out of question before deregulation.

I bought a large row house in downtown Baltimore, with fixed rate 5% down. The price was 112500. I knew I could have afforded up to 350k. Instead, I also bought a rental property price at 220k. When I moved to this house in 1999, there were prostitutes on the main street and there was a shooting only a block from our home. Now, things has changed. With a lot of repair and renovation ( still not finished ), I already tripled my house and doubled my rental property.
I also purchased another rental property with Home Equity Line of credit on my residence. ( Because my balance is now less than 90k on my home, we have a huge equity.) While I was renovating this newly purchased property, I only paid interest. Now, all three units are occupied, I am planning to pay off the balance quickly.

Meanwhile, admin assistant at my day time job, just bought a house in Germantown, MD. She paid 250k. Now, she found a single family home in different location and she is buying it even before she is selling her first home. New home price is 350k. She does not have any financial security blanket like myself nor her household income is as high as ours.

If you buy a commercial property with any creative finance, they works well assuming you know what you are doing. However, stretching yourself to far for just buying a place to live is not. You are only paying higher interest and make bank richer. Like sub prime credit card, bank is taking a calculated risk. It is always a bad idea to loan 'expensive money'. The house you live is not your investment property since you have to live. When your home appreciates in value, you think you can make money by selling it. The problem is that you also have to buy a house to live. Unless, you plan to move to cheaper area, you don't make much money.

One more note. Retiring babyboomers may sell their large single family home in suburb en mass. This means the price of this type of home will go down. Meanwhile, many young professionals may postpone buying their first home. They are the most debt ed generation ever.
I believe the bubble bust varies in intensity and timing depending on the region. However,current price level of many suburban homes cannot be maintained. Think about it. Many homes used to be priced at 250k to 350k are now priced at 500k to 800k. How many people can afford to pay more than 5k mortgage payment per months. I have an access to regional listing for viewing. I checked these 800k homes. Clearly, it was originally around 250k or so because the level of amenities and the current owner furnishing tells me so.

Banks selling risky loans to many who were not qualified 10-20 years ago. It is like credit card problem.

This is my 2 cents.

Just my 2 cents

[mike_c]

1. thanks for your thoughts....

I'm one of those folks who makes a good salary and has good job security-- I'm a tenured university professor, and I earn quite a bit more than the local median income-- yet cannot afford to buy a home because the prices have exploded during the last ten years. Consequently, despite being a well employed professional, I'm never more than a month away from living in my car. Housing prices are insane. When only the rich can afford to buy a home, something is seriously wrong. Unbridled greed has become the driving force in American society.

[Neil Lisst]

2. hertopos, you're on dead on, my friend

The ratio of debt to income is the killer. The mining of home equities the past 5 years has artificially kept the market higher than it should, as more debt per consumer piled up.

The country has been running on debt since Bush took office, both at the federal AND consumer levels.

I think we're in for a big drop in 2006. I fear Iran and Venezuela may squeeze production downward, and that is all that is needed to bring the onset of a serious downturn.

[hertopos]

3. Actually, I meant to post this to GD not GD politics...

There were serious discussion regarding this topic and I started a new thread instead of posting this one to that thread.

Hertopos

[SteppingRazor]

4. Then I'll move it to GD...

your wish is granted!