In the past, when interest rates started to go up, people with high-risk mortgage loans often gave the keys to the bank.
But a recent study by First American Real Estate Solutions says that even if rates go up this year, the number of defaults probably won't go much higher than $110 billion.
The study said that of the 7.7 million adjustable-rate mortgages sold in 2004 and 2005, 1.4 million were likely to go into default. But even if that many households didn't pay their bills, it wouldn't have a big effect on their finances.
This is because the US economy is so strong and diverse right now that this amount is only about 1% of the total equity of all US homeowners and would be paid out over two or three years. So the economy would be able to handle the losses very well.
- *Factors that are keeping the real estate boom going
Even though many real estate experts think that real estate and mortgage activity will slow down a bit in 2006, most also think that the economy will continue to grow and that the supply and demand in the housing market will be about right.
Some of the things that drive the housing market:
+ Low interest rates have stayed low. Even though rates went up a little in 2005, they are still at all-time lows. Homes that were bought in the last few years with interest-only mortgages or mortgages with rates that change will be refinanced. Homeowners will refinance to take advantage of their homes' increased equity and to switch to fixed-rate mortgages when interest rates start to go up.
+The Internet Effect: Buyers can look at MLS listings on the Internet without going through an agent or broker. Not only do people know more about their options and how to take advantage of them, but it also takes less time to buy a house now than it did four or five years ago. This trend will keep getting worse.
+ A healthy economy leads to more moving. A strong economy and a lot of people buying and selling homes are also good for business. And when people follow business and job opportunities, this usually leads to corporate moves. That means more buying and selling of homes.
+ The Generation X effect: As baby boomers start to retire and get out of the real estate buying and selling cycle, Generation Xers have stepped in with a vengeance to fill their shoes. Gen Xers' incomes are usually higher than those of the boomers, and it's easier for them to get loans, so they've been able to buy more expensive homes sooner than boomers did. Gen Xers now make up 47% of all homeowners in the U.S., and their influence is especially strong in downtown and suburban areas.
Life insurance doesn't cover many mortgages in the UK.
A recent report from Sainsbury's Bank says that up to 4.2 million people in the UK don't have life insurance to cover their mortgages. That means that mortgages worth up to GBP217 billion can be given to family members. In the last few years, this number has grown a lot because more people have been given mortgages.
If you inherited a property's debt, you would also have to take ownership of the property itself. And since prices are going up, even if someone had to sell a home because they couldn't pay the mortgage, most people wouldn't be as bad off as the report might make it sound.
- *People in the UK choose fixed mortgages for two years.
A recent survey of mortgage purchases in the UK found that in January there was a big shift toward 2-year fixed mortgages. In January, 39% of those who borrowed money chose this option, while only 27% did in December.
In January, only 9 percent of buyers chose a fixed-rate mortgage with a longer term, compared to 16 percent in December. Even though longer-term mortgages (up to 10 years with a fixed rate) were less than 5%, this was the case.
The fact that 2 year fixed mortgages are so popular shows that buyers think rates have hit rock bottom, at least for the next few years, but aren't sure they won't go down even more in two or three years.
