Thursday, July 28, 2005

Trapped in the Bubble

An article from today's New York Times called "Trapped in the Bubble" shows that real estate appreciation can hurt those who have ostensibly gained from increases in property values. The problem that many sellers now face is that the equity built up on existing homes does not make up for the even greater price increases that has occurred in the larger homes into which sellers would like to move.

"In the hottest markets, owners whose homes have skyrocketed in value find themselves in a frustrating paradox. They were supposed to be the lucky ones: they bought in frenzied real estate markets like New York and Los Angeles three or more years ago and have amassed hundreds of thousands of dollars on paper.


But as they try to roll that considerable equity into a bigger home, many are unpleasantly surprised to find that the cost of real estate at the higher end has outpaced their ability to buy. For homeowners who have watched the torrid housing market create wealth as if by magic, scanning the classified ads or visiting a few open houses serves as a harsh reality check.

For the Boalses, who had owned their previous apartment for just three years, the best option was a $950,000 unit that had gone unrenovated for 30 years. But since it was only slightly larger than the apartment they had just sold - and would require a mortgage nearly twice as large as their previous one - the couple decided to rent."

But many refuse to rent and instead stretch themselves with creative mortgages to afford these higher prices.

"Some buyers forge ahead, but end up taking out riskier mortgages simply to afford the monthly payments. Marie Kuranishi and her husband, Tony Guinta, sold a condo earlier this year in Playa del Rey, Calif., a suburb of Los Angeles, for $450,000, nearly twice what they had paid for it, and bought a $632,000 house in a more remote suburb. To finance the jump, they took out two interest-only loans, paying no principal for a fixed period. Even so, their mortgage payments have gone up by more than $1,000 a month."

Query whether the status quo can maintain much longer if many new owners are in the situation described above.

Link:

Trapped in the Bubble

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