A few years ago, an end seemed nowhere in sight for soaring home prices in San Diego. Between 2000 and 2005, the median home price — the midpoint in the market — shot from $234,000 to $494,000.
Would-be buyers bid aggressively for homes, desperate to get into the market as soon as possible. They feared being priced out forever, and also wanted to take advantage of the almost-guaranteed appreciation of several thousand dollars every year. And many already-homeowners took out second mortgages, borrowing against their increased home values.
While housing prices surged more than 210 percent between in those five years, the median household income crept up just 8 percent. A rule of thumb for budgeting housing costs is to spend no more than one-third of a household’s income on housing costs — whether mortgage or rent payments.
But about half of the county’s homeowners, and a little more than half of the county’s renters, spent more than 30 percent of their income on housing costs in 2005, according to census data.
And if homebuyers are advised to purchase homes within just three or four times their incomes, only about 9 percent of the county’s households (those making $150,000 or more annually) could afford the median-priced home in 2005.
But lenders responded to the gap between the wages people earn and the homes available for sale by creating new financing options, especially for first-time homebuyers. The popularity of so-called “exotic” loans increased substantially in the housing boom.
The mortgages adjust years later according to interest rates for the rest of the term. The appeal of these mortgages is that they allow borrowers to enter a housing market they might not have otherwise accessed through low monthly payments. Some choose to pay only the interest. Others pay only a portion of the interest accrued each month, meaning that their debt incurred actually grows — rather than shrinks — for a period as the loan ages.
In other words, the actual cost of paying back the loan is deferred. Homebuyers plan, essentially, to wait to pay off the debt they’ve incurred.
Consumers take on these “exotic” loans based on the assumption that the real estate they are purchasing will increase in value. They believe that the value of their homes will have increased enough by the time increased payments come due that they can refinance their mortgages — delaying the payments again. Or in the worst case scenario, they know that if they can’t afford the payments, their house will be worth more than they owe on the loan and can sell or borrow against their equity in some other way.
Regardless, they have to prepare for an increase in their monthly mortgage payments somehow. When interest-only, adjustable-rate mortgages and other types of loans reset, the monthly payments can be kicked up by a few thousand dollars a month. Sometimes, the payment can more than double.
So with the low introductory period of many loans about to end and a cooling housing market, a number of homebuyers are facing the prospect of a sizable jump in their monthly payments. Such a trend will undoubtedly impact consumer spending — what will consumers scrimp on in order to make their higher payments?
What’s also unclear is how these higher payments will affect the housing market. Will people find themselves in such difficult situations that they default on their loans at a higher rate then before? Foreclosure rates have been on the rise. Will more foreclosures pull down the prices of all homes?
Adding uncertainty to the market is the infusion of new products for homebuyers like rental apartments that were converted into condominium units for sale when the sales environment was hot.
Those units, called condo conversions, constitute most of the lowest-priced homes on the market now. Scores of apartment buildings across the county were remodeled and renovated to be sold as condos in the red-hot day of the housing market. The price of the average condo has dropped about $20,000 in the last year, and recently converted condos have flooded the market. Some condo conversion projects are now being reverted back into apartments.
But it’s not all numbers and graphs. Buyer/seller psychology is what many real estate analysts consider the “x-factor” — the part of the market that can’t be logically graphed and analyzed. It’s hard to predict what people will do — buyers and sellers alike — especially in a market that finds itself in unparalleled uncertainty. And some say the media have chased tidbits of housing market news so hard that the coverage has actually influenced market activity.