House Crash

TTMCMschine

ruggerboy wrote: »

Hi Sisyphus

I agree that the supply of credit will dry up if interest rates rise. However, I think it's important to note that the US credit that you cite dried up after their interest rates effectively quadrupled over a 3 year period - from 1% in 2003 to 5.25% in 2006 (or a stomach-churning % increase of 425%!).

We, on the other hand, have not witnessed such a sharp rise in interest rates (3.5% in 2003 to 5.25% today = a percentage increase of 50%!), which helps explain why there is still a ready supply of credit available in the UK and not in the USA. The questions begs whether we're in for further interest rate rises to cause the supply of credit to dry up. As I've articulated above, in my opinion, the CPI figures do not support a case for further increases in interest rates.

Best regards

Chris

That quotation is often used to point out the differences between the US & Uk markets & is misleading.

It is important to realise that house buyers in the US never actually saw a mortgage rate of 1%. The 1% figure was for short term interest rates, mortgage rates fell from maybe 7.5% to 4%. Consequently although the STIR may have quadrupled, the mortgage rate paid by borrowers didn't.

You can read more on Wikepedia under the subsection "Historically Low Interest Rates" of the following article:

http://en.wikipedia.org/wiki/United_States_housing_bubble

TTMCMschine

You can also see some graphs here:

http://news.goldseek.com/LewRockwell/1174866700.php

Showing the Fed Interest rates compared to mortgage rates - & they ain't never at 1%.

Sisyphus

TTMCMschine wrote: »

That quotation is often used to point out the differences between the US & Uk markets & is misleading.

It is important to realise that house buyers in the US never actually saw a mortgage rate of 1%. The 1% figure was for short term interest rates, mortgage rates fell from maybe 7.5% to 4%. Consequently although the STIR may have quadrupled, the mortgage rate paid by borrowers didn't.

You can read more on Wikepedia under the subsection "Historically Low Interest Rates" of the following article:

http://en.wikipedia.org/wiki/United_States_housing_bubble

quite right - I meant to mention this y'day Ruggerboy - that is an often use but invalid argument abt US interest rates.

pollyanna24

Wow, an amazing response to my initial post. Thanks for everyone's comments. They have gone some way to alleviating my fears.

We're a young couple trying to do the sensible thing, so this time last year borrowed about 3.3 x our joint income to buy a house in Watford. We don't have any debts and just wanted a house over our head (admittedly, we probably didn't need the 3 bedrooms, but at least now we don't have to move).

Therefore, it's a bit scary when people say, don't overcommitt etc. as I know even though we were sensible (and I'm not planning on getting pregnant for a few years yet), if rates were to go above 10%, we would be !!!!!!ed.

ruggerboy

That quotation is often used to point out the differences between the US & Uk markets & is misleading.

It is important to realise that house buyers in the US never actually saw a mortgage rate of 1%. The 1% figure was for short term interest rates, mortgage rates fell from maybe 7.5% to 4%. Consequently although the STIR may have quadrupled, the mortgage rate paid by borrowers didn't.

Hi

My apologies if I've mis-led! Not my intention, as I was comparing central bank base rates - and that point still stands!

You are, of course, correct that the American mortgage market (and, in particular, the sub-prime market) has not seen a quadrupling in interest rates, more a doubling - as the following example shows.

New Century Mortgage Corporation offers the following interest only product - see: https://www.newcentury.com/ratesAndPrograms/DynamicRateSheets.pdf?comp_code=CONV/WSL&matrix=302&state=CA&zip_code=92602&tco=0&color=1&isAE=0

US sub-prime mortgages tend to be based on "base rate +" (similar to our own tracker or SVR mortgages). Scroll to the extreme bottom right of the document and you will see two boxes which contain key information. The box entitled "Rate Information" says:

3) The Qualifying Rate is the fully indexed start rate plus 3%.

In other words, the Qualifying Rate is the interest rate you pay based on the fully indexed start rate (ie. LIBOR rate) plus 3%.

The next box entitled "Index/Caps" says:

The 1 month LIBOR index is published in the Wall Street Journal. Historic range for the previous 10 years is 1.09% - 6.8%.

So, let's imagine I'm a borrower who took out this mortgage when the LIBOR rate was rock bottom - it would be 1.09% + 3% = 4.09%. However, the LIBOR rate has now risen to 5.25%, so I'd now be paying 5.25% + 3% = 8.25%. And, if you scroll now to the top left of the document, you will find that this 8.25% is within the range of rates offered (give or take a few 0.1% variation based on commercial decision by the bank depending on my credit rating).

So, in this instance, a change in the mortgage rate from 4.09% to 8.25% is a percentage increase of 102% - in other words, double!

Now, as I understand the American market, it is the sub-prime market which is at the root of the housing market problems over there. And, to be honest, with a doubling of mortgage rates, I'm not surprised!

However, if you use a tracker-rate mortgage as the appropriate measure for over here, then equivalent mortgage rates have only risen by 50%. The consequence of this has clearly not been enough to cause a crash.

Hope this clarifies things.

Regards

Chris

Generali

ruggerboy wrote: »

Now, as I understand the American market, it is the sub-prime market which is at the root of the housing market problems over there. And, to be honest, with a doubling of mortgage rates, I'm not surprised!

I think that the sub prime problem in the US is slightly unusual in that poor families were sold 'Adjustable Rate Mortgages' (ARMs).

An ARM would be called a Low Start Mortgage or similar over here. A very low rate of interest is charged to the customer initially (say the 1st year or 2) and unpaid part of the interest is rolled up into the mortgage.

After the initial offer period has ended, the interest rate 'resets' to a much higher rate. In many cases, people's mortgage payments have doubled. Also, in many cases, people were not told about the increase in payments or even lied to about it!

The people who were sold these mortgages were poor and often financially illiterate and, while they should have understood what they were signing, were taken advantage of. There is talk in the US now of banning banks from reposessing houses bought on ARMs while Congress investigates what went on.

Sisyphus

Generali wrote: »

...
The people who were sold these mortgages were poor and often financially illiterate and, while they should have understood what they were signing, were taken advantage of. There is talk in the US now of banning banks from reposessing houses bought on ARMs while Congress investigates what went on.

I bet you the banks didn't factor that in to their risk models!

Take away the house as collateral and what have they got left?

Greenstuff_2

Hi everyone, thanks Chris and all, I confess I'm getting lost but find it fascinating.
I had a thought, I have read on a Forum (not sure how accurate) the link between US and UK markets, and 6 months ago they had HPC2 so we should follow.
Someone said that US Mortgages are always repayment where as much as 40% here are IO, and most are 100% too.
Since the laws relaxed recently on bankrupcy, what's to stop these people who have 100% Mortgages or 95% and the 5% on loans CC's for instance, (ie put none of their own money in) paid IO so only as much if not less than they would in rent, sitting pretty.
If prices go up great, if they go down just declaring bankrupcy and walking away?
If they did it in one partners name the other could get loans etc in the future, and isn't it only 3 years it follows you now?
And dosnt it go by address? since you would be moving anyway...
Or is that a load of rubbish?!

Romani_Ite_Domum

Sisyphus wrote: »

It's like the weather, if they can't predict CPI for next month or the month after, they haven't a chance in hell of predicting year end inflation. Don't forget their target for CPI is supposedly 2%.

Very true and a target they are finding very hard to meet. Although it is not their job to control HPI they are also aware that unless the housing market continues to perform, the country will fall into a recession.

Oh dear a very big bubble to try to land without bursting it.

Greenstuff_2

Pollyanna - in answer to your question!
As far as I remember and I was quite young, there were some warnings.
I remember my brother who is a carpenter and builder talking about it being a big bubble but really didnt get it.
I remember lenders being really criticised for being irrisponsible and I think thats when new guidelines were introduced such as the 'your home is at risk' warning and indemnity policies.
I remember people I worked with basically saying you were a nobody if you didnt own a house and many going for ex council flats as they were 'affordable' and doing them up on credit.
I don't think I knew anyone with savings or who was not in a lot of debt.
I do remember coming out one morning to see that exact sight of the for sale boards lining the street, it did seem like overnight, and they were those huge ones that would blow away every windy night!
They had to introduce a max size for them as it was ridiculous.
A lot of my parents friends had bought their council flats and had to be rehoused by the council!
There was definatly a got to own a house mentality, and lots of singles were buying to link to a pension as it came to light that pensions and endowments were seriously under performing.
I thankfully didn't see any of the horrors that I have heard of, ie people living in their cars.
That's all I really remember...
I think people are more clued up now, and there is a lot of talk about a crash so people are begininng to look closer and are being more cautious thankfully.
I do wonder though, there is talk of building 80,000 social houses for the next 3 years, is that in preperation perhaps?