Bay Area housing remains expensive; creative financing common

Many sales in Bay Area involve Option ARM or interest-only mortgages

The prices of houses in the United States have stabilized a bit in recent times. While the past five years have shown explosive growth in the housing market, recent rises in interest rates have caused a bit of a slowdown. That doesn’t mean that housing is affordable, however. In certain parts of the country, a slowdown just means that houses are really unaffordable, as opposed to outrageously unaffordable. If you are a buyer in one of those markets, you still have to come up with a lot of money to buy a house.

The Bay Area of San Francisco is one such example, with some of the most expensive housing in the United States. It is certainly a very pretty place to live and the danger of possible earthquakes has not done much to dissuade buyers from moving there. With a median home price of more than six hundred thousand dollars, this housing market is not for the squeamish. It will take a lot of money to buy a house there. And because of the high prices, a large percentage of buyers are resorting to what may be best described as “creative” or risky, lending options.

Most mortgages in this country are traditional, fixed-rate 30 year home loans. The buyer makes a down payment and finances the rest for thirty years with a fixed interest rate. He or she will make 360 equal payments and the home will be theirs. With $600,000 homes being merely average in the Bay Area, most people cannot afford to take out a fixed-rate loan. Instead, they have to use some other, more flexible tools from the lender’s arsenal.

Nearly half of all mortgages in the San Francisco area (43%) involve some sort of financing that allows the buyer to avoid paying any loan principal for several years. These loans include interest-only loans, where the payment for the first few years includes no payment towards the loan principal. These loans tend to have artificially low payments in the early years; the later years have higher payments than a fixed-rate mortgage in order to compensate for the shorter period of time available to pay down the principal on the loan.

The most common type of loan being issued now among the riskier mortgages is the Option ARM, which has many analysts worried. The percentage of such loans issued in the Bay Area has tripled in the last two years, which is enough to scare anyone. An Option ARM isn’t scary in and of itself, but the loan comes with four different possible payment amounts each and every month. The buyer has a choice of paying a “minimum” amount, an interest-only amount, or an amount that will retire the loan on 15 or 30 year schedule. These loans are great for people with seasonal incomes, commission only incomes, or other types of jobs where the amount of money the borrower earns varies throughout the year. Unfortunately these loans are increasingly being offered to people who can only afford the “minimum” payment, which is based on an artificially low “teaser” interest rate. Such rates leave open the possibility that the principal may actually increase if the buyer doesn’t send in enough money to cover the interest. In time, the lender may require that the loan be “recast”, which will increase the monthly payment substantially perhaps to a point where the buyer can’t afford it anymore.

Buying in the Bay Area is best suited to the brave.