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The domino effect of rising interest rates
The first thing that will happen in this country when interest rates go up,
Spoiler
as they eventually will, is that a huge percentage of homeowners won't be able to make the payments on their home. Their credit card payments are due, and those are higher, too (thanks to higher interest rates). Then their house payment comes due. They were paying $500 a month. Now they have to pay $1,000 a month because interest rates are 12 percent. What happens? They can't make the payment. What do they do?
I've been wondering about this, even before reading this article, and hopefully someone with more business/economics/real estate smarts than me can help me understand. Interest rates did not go up, in fact they are lower now than they've ever been. (I realize this is artificial, but that's a separate issue)
I bought a house in 2001 at 7%, refinanced in 2003 at 6%, refinanced again in 2005 for 5%. Last year I sold that house and purchased another one basically still at 5% - this year I'm refinancing at just over 4%. a friend of mine bought his house in 2000 at about 6% for 3 years with ARM after that. His interest rate has steadily dropped since his ARM kicked in 7 years ago - right now he's paying about 3.5%. Besides his ARM we have only used 30 year or less mortgages - nothing fancy.
So what exactly happened? interest rates never came remotely close to 12% as in the example in the article. The resetting of ARMs should have at least helped out some people right? What am I missing? help!
From 2004 to 2007 over $1 trillion in proceeds either from selling or refinancing went into purchasing rental or vacant homes (including vacation properties).
Without a doubt many California homeowners tapped their equity to purchase homes in Arizona and Nevada and pushed prices to absurd levels. At the height of the boom in Las Vegas 4 out of 10 home sales were investment properties.
The CA equity funded a very large portion of the NV/AZ bubble. But it was no place near 40%. It was almost exclusively new homes...and ran square into a brick wall in August of 2006 in Las Vegas. The rest of it was the rise in the new build carrying everything else with it and the inertia holding up the prices through 2007.
Note that the speculators pretty much got two turns and out leaving almost exclusively locals holding the bag. The AZ up trailed the NV by about six months.
The result of course was that anyone who bought from 2003 to 2008 was underwater by 2009 by anything from 35 to 50%. In general the number was so high that none of the programs applied.
Thanks for the post Enlightening reading. As a lay person, I now understand what the whole housing crisis was about. I learned something today!!!!
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