REAL ESTATE BUBBLE

Excellent comments in today's Wall Street Journal on the ridiculous real estate market and America's consumer debt accumulation:

If you borrow $350,000 with an interest-only mortgage that carries a fixed rate of roughly 4.8% for the first five years, here's what you will pay:

-The monthly payment on the loan would be $1,403 during the initial period.

-Even if interest rates don't rise, the monthly payment would jump to $2,008 after five years.

-If rates jump by two percentage points instead, the monthly payment would jump by 73% to nearly $2,500.

[...]

In California, where home-price growth has been sizzling, interest-only loans accounted for 61% of the mortgages taken out to buy homes in the first two months of this year, up from 47.1% in 2004 and less than 2% in 2002, according to an analysis prepared for The Wall Street Journal by San Francisco researchers LoanPerformance, a unit of First American Corp. Just 18% of California households can afford to buy a median-price house using a conventional 30-year fixed-rate mortgage, according to a report issued this month by the California Association of Realtors.

In another report issued this month, mortgage strategists at UBS AG called the shift to ARMS and nontraditional mortgage products such as interest-only loans 'symptomatic of...the end of the housing cycle. The thing that all of these loans have in common is that they allow homeowners to buy a more expensive home than they could have qualified for with a 'traditional' loan.

[...]

Since 1990, income for the median American household has risen only 11% after adjusting for inflation, while median household spending has jumped at 30%, according to an analysis by Economy.com. How could the typical family afford to spend so much? Median household debt outstanding has leaped 80%.

Despite the dicta of old sages, many economists--led by Federal Reserve Chairman Alan Greenspan--see the expansion of credit to lower-income families as a sign of progress. Some speak of the "democratization" of credit. In an April speech, Greenspan said that in colonial times through the late 19th Century, only the affluenct had access to credit and raters were high. In the early 20th century gasoline companies and retail stores started issuing credit cards, but cards didn't spread widely until the late 1960s when banks piled into the business. Now, Mr. Greenspan says, "innovation and deregulation have vastly expanded credit availability to virtually all income classes.

The funniest strategy: purchasing a house on interest only or ARM and then recruiting your friends to pay your rent so you can afford to make the mortgage payment. Disaster waiting to happen. International Phone Cards House review