more on Tech: A 'hostile environment' for US natives????

[David Farber <dave () farber net>]

Begin forwarded message:

Tom Goltz gives an analysis of the cost of owning a home at the median
price in Santa Clara county based on a 10% downpayment and a 6.5%
fixed rate, and points out that the median income can barely afford
it. And then asks:

"Now, based on the idea that developers must compete on price on an
international basis, where do you propose that a developer living in
Santa Clara County should cut their expenses so they can afford to
deliver their services at a significantly lower price?"

Well, the answer is that most borrowers in California wouldn't dream
of paying a fixed rate (even though rates are more like 6% than 6.5%).
 Instead they are taking adjustable rate mortgages (ARMS). Many, if
not the majority, are taking ARMS with an interest-only feature for
the first 5 years.  A loan like this has a payment 25%-30% lower than
the fixed loan. If that's still not affordable, the newest mortgage
product which is growing explosively is the so-called option ARM,
wherein a borrower can make a minimum payment - often equivalent to
just 1% - which is "negatively amortizing", that is, the mortgage
balance is going up, not down, each month. As scary as that sounds, it
does allow for a payment less than half that of the fixed rate
example. Tom's analysis of home prices relative to income makes it
clear why people are attracted to these riskier mortgages.

Glenn Costello

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