Home Equity Increases $1 Trillion in Five Years - Is the
A new survey reveals that in the last five years, the equity
in the California real estate market has increased by more than
one trillion dollars. A trillion dollars is a large number to
ponder, but put in concrete terms, it can be represented by a
stack of one hundred dollar bills that is six hundred thirty one
miles high! This astronomical increase in California home values
isn't all that unique, however. Prices on the East Coast,
particularly in the Washington, D.C. area, are increasing just as
rapidly. There are areas on both coasts where home prices have
tripled during the last five years. This, along with the dramatic
increase in interest-only mortgages among homebuyers, suggests
that home prices may be peaking.
In California, 35% of all mortgages written are interest-only
mortgages. In Washington, the figure is a whopping 48%. With an
interest-only mortgage, the homeowner pays only the interest on
the home loan for the first few years of mortgage payments. After
the agreed-upon period of time ends, the amount of the payment is
adjusted to include a portion of the principal. This typically
increases the amount of the payment by about one-third.
Interest-only mortgages have gained in popularity as home prices
have increased, mostly because buyers otherwise would not be able
to afford to buy homes. The problem with these mortgages is that
for the first few years of payments, the buyers aren't actually
paying anything for the home itself!
What these statistics tell us is that in California, more than
one third of buyers cannot afford a mortgage that allows them to
actually contribute to paying for the home when they move in, and
in Washington, the figure is nearly one half. Experts disagree on
exactly when the hot real estate market will collapse, but it
would seem to the casual observer that when half of all buyers
can't actually afford to make payments on the home they've just
purchased, the collapse may be near.
What does this mean for potential buyers? Anyone considering
purchasing a home in the red-hot markets in California or on the
East Coast should carefully consider whether or not they can
actually afford to purchase a home. Qualifying for a loan isn't
good enough if you can't actually make payments that will reduce
your principal. If may be wiser to buy in a cheaper outlying area
and commute. Others may wish to rent in the short term in hopes
that the prices will soon decline. It is always difficult to
predict which way the real estate market will go, but a market
where one-third to one-half of buyers can't actually reduce their
principal should set off an alarm for anyone considering a real
©Copyright 2005 by Retro Marketing.
Charles Essmeier is the owner of Retro Marketing, a firm
devoted to informational Websites, including End-Your-Debt.com, a
Website devoted to debt consolidation
information and HomeEquityHelp.net, a site devoted to information
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