Marginal Utility

by Tom Bozzo

An interesting article on housing affordability from the front page of today's Personal Journal has the scary subhead, "Creative Mortgages, Which Have Kept Monthly Payments Down, Start to Lose Steam." Uh-oh.

The article reports results of a Bear Stearns study showing that initial payments on jumbo mortgages declined from 2002 to early 2004 — reflecting the increasing prevalence of "creative" mortgage products in that end of the housing market — but have since started to turn back up as price increases have accelerated and the spreads between fixed-rate mortgages and more creative alternatives have narrowed.

This goes a long way to answering the who-the-hell-can-afford-these-houses question, particularly in the face of the last few years' relatively stagnant incomes (*), though it also should provide an "eek" moment (or two) for anyone inclined to believe that the recent outsized price increases can go on forever. Once the gains from technological advancements in house financing are exhausted, as they'd seem to be, the combination of rising prices, rising interest rates, and relatively flat incomes can reasonably be expected to thin out the market, with prices and quantities adjusting accordingly. Just don't ask me when.

To note a point developed in the previous comments thread on the topic, conditional on being inside one's unpopped regional bubble, move-up price increments are not necessarily onerous (in effect, the entry price can be paid out of one's own inflated housing currency, and then incremental space is priced somewhat in line with its replacement cost) even as migrants from low-priced areas find themselves SOL. The catch is that when the supply of suckers buyers runs out because nobody can afford anything, this is a transmission mechanism for the pop between markets as well as market segments.

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(*) Some upper-bracket house purchasers have undoubtedly done better than the median in the income department.