Sunday, March 12, 2006

Housing Prices to Decline

Saturday's WSJ has a couple of excellent articles about non-traditional mortgages. Many recent homebuyers will soon see their monthly payments increase because interest rates are rising. It turns out a lot of these people are completely unaware this will happen. The concern is that they will not be able to meet the new and higher monthly payments, and will face foreclosure. Given that inventories of new and existing homes are at multi-year highs and rising, it is inevitable that prices will also fall. So not only will many homeowners be asked to make larger monthly payments; they will also see reduced equity.

It's ironic that just a couple of years ago when fixed mortgage rates were already quite low, former Fed Chairman Alan Greenspan argued that more people should be using floating rate mortgages. Instead of locking themselves into a low rate for 15 or 30 years, those who listened to Mr. Greenspan are now facing fairly sizeable increases in their monthly payments.