Here comes the 40 year mortgage

https://www.wptv.com/money/real-estate-news/federal-housing-administration-greenlights-40-year-mortgages

In what has been called “if it helps people get into homes, it is a good thing” (omg nooooo), the FHA has given the green light go ahead to offer 40 year mortgages.

Why is this a bad idea? Well, it would be a shorter list to make of why this is a good idea. We have a bloated overinflated price on homes. We have soaring interest rates. People are purchasing homes at prices that far exceed their actual worth.

When did this problem truly start? 2017. Why was 2017 so important? Well, during the housing crash of 2008-2010, many people went underwater on their mortgages, could not afford payments, filed bankruptcy or foreclosure on their homes. The market went stagnant and home values tanked for many years. Back in those days I lived in a new build starter home that I purchased in 2006, and it lost half of its value in a year. It FINALLY returned to pre-crash value in 2016. I sold it in 2017 for a mere 10k more than I purchased it for in 2006. Anywho, back on track here. The reason 2017 is relevant is because the “statute of limitations on your credit being trashed” expired. Everyone who went through a bankruptcy or foreclosure in 2008-2010 had served their 7 year sentence of a credit report showing that negative event, and their credit scores jumped back up. The housing market prices stayed flat until 2017. Then things got hot again. People who rented for the last 7 years were looking to buy again. Supply was smaller than demand and house prices began to climb. The climb did not end until mid to late 2022, where prices began to stagnate but did not really drop. The main reason? Interest rates have jumped through the roof.

We created an artificial shortage in 2017 by flooding the market with people who had had no ability to purchase a house for the last 7 years due to a foreclosure, and now millions of homebuyers were back in the game. The housing gurus knew this was coming……they knew they were sitting on a potential cash cow. Unemployment was at all time lows, 401k’s were seeing amazing returns, the economy was thriving. People had put 2008 in their rear-view mirror and were ready to go back to the glory days. This created the perfect breeding ground to build build build and inflate prices each month. But interest rates remained so low, that homeowners were able to justify that overpriced home because the payment was not so bad when you have a 2.8 or 3.1% interest rate. During covid, houses were flying off the market so fast that people were offering tens of thousands over asking price to get into a home. Here in my subdivision, which is a typical middle class subdivision with young families, retirees, blue collar and white collar workers, the price of a home in 2020 was HALF of what the same homes are listed for now. We also have 15+ spec homes sitting empty due to the stagnation of the housing market. We have a neighborhood watch and have had to call police due to people parking in areas that have yet to be built doing lord knows what at midnight into the wee hours of the morning.

With the inflated interest rates, houses not moving, what better way than to increase the terms of a loan to make it “affordable”. Except it isn’t affordable. The article above lays out a great example. Bankrate.com recently compared 30- and 40-year mortgages and found on a $312,000 loan at 6.85% interest, the monthly payments were $2,044 for 30 years and $1,904 for 40 years. They are saving $140 per month. But how much more interest are you paying for that extra 10 years of a mortgage?!?! If you stayed in that home for the full 40 years, that would equate into an extra $170k in interest paid. Their logic is that people do not stay in a mortgage for long term anymore, usually 5-7 years, so “it is no big deal”. Except for the minor detail of with interest rates this high, your monthly payment is going to more interest than principal. It takes years to put a dent in what the house price is versus what you pay in interest. Your only option is to refi at a lower interest rate when(if) they drop. So what happens if the housing market prices drop? These homebuyers are in big trouble. They will be sitting on a 40 year mortgage, at 7%, on a house that is at a “market corrected” value of potentially tens to hundreds of thousands of dollars less than what they paid for it. Watch what foreclosures do then! It will be 2008 on repeat, just for different reasons.

In another article https://unusualwhales.com/news/the-us-housing-market-isnt-going-to-see-a-2008-sized-crash

“For a buyer purchasing a $400,000 home with 20% down on a 30-year fixed loan, the monthly payment, including principal and interest, is now roughly $230 a month more than it would have been a month ago. Compared with a year ago, when rates were in the 4% range, today’s monthly payment is about 50% higher.”

“Consumers have taken on a record amount of debt, including mortgage, personal, auto, and student loans,” noted George Ratiu, senior economist at Realtor.com. “With rising interest rates, financial burdens are expected to increase, making consumer choices more difficult in the months ahead.”

The other “fly in the ointment” is the county I live in has already warned us that property taxes will be going up on an average of 30% this next year. I highly doubt we are the only county seeing this issue. I know we are not. So you have a perfect storm now. You have a family who purchased a $300k house at the overinflated value of $600k. On a 6.4% interest rate 30 year mortgage. They escrow their taxes and insurance. Potentially have PMI if they could not afford the 20% down on the inflated house price purchase they made. And now the county is gonna come calling and say oh hey you owe another $200 per month for taxes, but we also threw your escrow into the negative paying that tax increase so for the next year you owe an extra $400 per month to pay us back your taxes we covered for the year, and provide the extra for next year when the tax man comes calling. This is a recipe for disaster.