Globe warns "Mortgage trend poses risks in downturn"

My compliments to the Boston Globe for running their third front page story on real estate in the last four weeks (see previous blog posts on May 20th and May 3rd).  Today's lead story, Mortgage trend poses risks in downturn, is the first to raise cautions about the downside of the real estate bubble to the lead headline and includes an alarming graph showing that interest-only loans and adjustable rate loans made up about 70 percent of all loans in Massachusetts last year, and just under 60 percent currently.  Those market trends are even more troublesome when one adds no money down deals or sub-prime loans.  According to the Washington Spectator, one in four loans nationwide involve sub-prime loans. 

So what is any ordinary buyer to do now to protect themselves, now that there are signs the real estate market has peaked as reported six days ago in another Globe story entitled:  State home sales sag 10% in April?

The Wall Street Journal's online site, RealEstateJournal.com, has been raising concerns about risky loans since last fall, and has written a number of articles to help buyers "Know the Real Price of New Mortgages."  One encourages buyers to exercise due diligence and includes a link to an innovative negative-amortization calculator:

If you're considering an ARM and aren't sure whether a sudden jump in rates would break the bank, ask your broker to run a worst-case scenario for monthly payments and outstanding loan balance, based on the highest rate you could potentially be charged. This negative-amortization calculator from the Web site of Jack Guttentag, professor emeritus at the Wharton School of the University of Pennsylvania, also offers a stark look at how homeowners with these types of loans can get burned should interest rates turn sharply higher.

If as the Globe writes, "analysts fret over use of interest-only loans," you should look carefully, too, particularly if you are first-time homebuyer.  Real estate decisions involve a complex, imprecise set of factors and online calculators "don't take into account individual circumstances" as the WSJ wrote in an article a year ago on "Five Reasons to Remain in Your Rental Property."  Today's lead story on "timing the market" in RealEstateJournal.com says some long time homeowners are "tempted to sell, reap a huge profit -- and rent for a while to wait until prices possibly come down." 

Locally, that could result in more inventory on the housing market, and softening prices -- regardless of what kind of loan you use -- by the end of the year.  If "worse-case scenarios" play out and new homeowners are forced to sell in coming years because of they can no longer afford monthly payments on their interest-only or adjustable rate mortgages, today's rising inventory of unsold homes could become bloated and some sellers may be forced to sell at a loss.