The Re-ARM-ing Of The Housing Market Bubble

Tyler Durden's picture

Worried about being priced out of the housing market once again? Concerned that longer-term fixed rates will rise? It seems the general public, guided by the always full of fiduciary duty - mortgage broker - has reverted to old habits and is charging back into Adjustable-Rate Mortgages. As The LA Times reports, ARMs, which all but vanished during the housing bust, are back - accounting for 11.2% of homes purchased in November (double that of the year before)! While not the Option Arms of yesteryear, it would appear people, pushing for lower monthly payments, remain completely oblivious to the word "adjustable" when they shift their risk to the shorter-end. Though, as the 'experts' continue to tell us, rising rates won't affect housing negatively - not at all...


Via The LA Times,

It seems we never learn...

When Michael Shuken recently bought his family's first home, a four-bedroom in Mar Vista, his adjustable-rate mortgage helped them stay on the pricey Westside.


For now, his interest-only loan costs him about 35% less per month than a 30-year fixed mortgage, he said. But he'll have a much bigger monthly bill in 10 years, when the loan terms require him to start paying off principal at potentially high rates.


"What is going to happen if I can't restructure my loan and extend it? Are interest rates going to be 7%, 8%?" the 43-year-old commercial real estate broker said. "The home is big enough for me to grow into. The question is, will I be able to?"


So, because they absolutely have to stay on the "pricey side" as opposed to move to what they can afford... it seems this attitude is becoming ubiquitous...

More homeowners in Southern California were willing to take that risk last year. In November, 11.2% of homes bought with loans carried adjustable-rate mortgages, or ARMs. That's double the rate of the same month a year earlier, according to San Diego-based research firm DataQuick.


"You saw a big swing in people taking adjustable versus fixed rates" when prices and rates shot up last year,



Of course, it's not about what house you can afford, it's about what monthly nut you can cover...

With interest rates expected to rise this year, the proportion of ARMs could increase further.


"Generally, as rates increase ARMs become more popular,"



But that could be a penny-wise, pound stupid idea...

"I don't think the product, in and of itself, is inherently a bad product," he said.


Of course, rates could adjust downward in favorable market conditions. But ARMs are still riskier than fixed-rate loans — especially when rates remain at historical lows but are expected to rise.


Shuken, the Mar Vista borrower, says he understands the risks. He plans to pay down some principal before such payments are required, he said. And he'll start planning years before the interest rate adjusts to either restructure the loan or sell the house.


"If people aren't thinking about that," he said, "they need to."

Yes, they do... With 5/1 ARMs the most popular, perhaps it is worth noting that 1 Year Treasury rates are expected (based on the forward curve) to rise from 10.9bps today to 3.977% in 5 years...

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NOTaREALmerican's picture

If humans could learn,  how would they reproduce?

kaiserhoff's picture

Second marriages are the triumph of hope over experience.

                                      Samuel Johnson

Say What Again's picture

I don't understand what all the fuss is about.

What could possibly go wrong?


Occident Mortal's picture

The first month of the taper is obviously the perfect time to enter a 5 year ARM... for the lender.

IPA's picture

But i am just going to like paint the house and stuff then flip it in six months 

Harbanger's picture

If the Fed can keep this going for another ten years it would be a miracle.  His house would however appreciate more than the interest he paid.  Besides interest payments are tax deductable.

max2205's picture

I will blow Ben if he doubles the price of my house....and someone can actually buy it.....

Harbanger's picture

That's the shell game that keeps everyone playing.  A comparable trade would then cost you at least twice as much.

Popo's picture

The fundamental economic truth that escapes real estate investors is the price/demand curve, if real estate in aggregate gets more expensive, there are -- in aggregate -- fewer buyers.

They all pat themselves on the back when prices rise, but few consider that the "price" isn't realized until they sell. And if they all sell, prices collapse.

As such, the only way to win is to stop playing well before everyone else. But greed keeps them all in the game. It doesn't take a genius to conclude that logically, most will lose money when the music stops.

N2OJoe's picture

I'm all for that as long as I don't have to bail them out.


Yeah, who am I kidding? Who else is on the hook for every reckless gamble made in this country...

Fidel Sarcastro's picture

If you like your interest rate, you can keep your interest rate.  Oh, wait...

duo's picture

you know, if I could buy a treasury bond with a coupon tied to M2 growth, I'd sell all my gold and buy that.  It would have yielded 25% last year, approx.

M0, MZM, it doesn't matter.  Give me an instrument that grows with the money supply and I'll buy it.

socalbeach's picture

Good idea, but M2 growth has been about 5% over the last year, not 25%.

Yenbot's picture

Second marriages are the triumph of hope over experience.

I got lucky the 5th time. So can you :)

A Nanny Moose's picture

Without learning russian and without sacrificing one or more kidneys?

johnconnor's picture

he is a real state broker and as his buddies keep saying "it has never been a better time to buy a home"... so he should fear nothing

PT's picture

Your production, and therefore your wealth, was taken from you and given to foreigners.
Your land is being stolen from you.

"Don't affect me.  I'm not gonna buy expensive land."  In that case you will have no land.  The land is transferred from idiot to idiot, with the banks taking a large slice of the fruit of the idiots' labours along the way, the price ever elevated so no-one can own and live.

Time to reclaim land.  Don't buy it.  Reclaim it.  You are born with no "right" to any soil and no way of acquiring any.   No-one owes you a living.  But you don't owe it to them either.

Bold words, but who is going to put the bell on the cat? 

Blue Boat's picture

@PT- good stuff....thanks for posting.

Belling the Cat -  It provides a moral lesson about the fundamental difference between ideas and their feasibility, and how this affects the value of a given plan.

SilverFish's picture



"Ya got no money, and ya
Ya got no home
Spinnin' wheel all alone
Talkin' 'bout your troubles and ya
Ya never learn........"

kaiserhoff's picture

Not that irrational in Calipornia.

Non-recourse, aka walkaway loans.

Heads the borrower wins, tails, everyone else loses.

Bastiat's picture

There is a tax consequence to walking away, no?

kaiserhoff's picture

Capital gains and losses are about two thirds of the code, so good luck getting a comprehensive answer.

In general, debt forgiveness can be a taxable gain, if you are solvent at the time,

  but it's not likely to show up on a 1099:)

Also, back taxes can usually be negotiated down to a pittance if you can't pay, or discharged in bankruptcy, unlike say, student loans.  If there were any justice in the world...


centerline's picture

Thanks K.  I logged in just to add what you said.

To continue...

Moral hazard - fuck me.  What has been displayed as status quo?  Greed is good?  Crime pays?  Go big or go home?

It's game over.  Everyone for himself/herself is the new normal I suppose.  Who gives a flying rats ass what a loan says when there isn't any recourse or can go bankruptcy or plain-old not giving a fuck about consequences.  This isn't about sound lending.  It is about more of the same... which ends in more taxpayer backstopping.  Next time: bail-in's instead of bail-outs.

Oh yeah, some bankers gonna do the perp walk next time and everyone will cheer as if the cash grab was worth it.  Meanwhile the real crooks will continue to live like rock stars and the system will continue towards the inevitable voyage into the abyss.

Tasty Sandwich's picture

The bail-in idea is interesting.

It's one thing for insignificant Cyprus to do it.

But, for the United States to do that...  it just seems to me that would ultimately shatter confidence in the system and lead to the same result of a cascading collapse of financial institutions.

Transferring obligations to the government seemed like it would probably be okay at the time and did instill confidence.  The world was like, "oh, well I guess you can do that if you want.  Okay."

I don't know if a US bail-in would instill the same sort of confidence in the system.

kaiserhoff's picture

Yes.  I try to avoid the tin hat stuff, but if you wanted to undermine all banking, just mentioning the possability of a bail in should be sufficient.  Qui bono?  Who benefits?

Well, what if you thought 10,000 financial institutions were way to many..., and you wanted to divy the whole thing up among four or five government affiliated TBTF bucket shops?   Hmmmm.

Tasty Sandwich's picture

Might buy more time.

But, don't you think the US government (and/or the Federal Reserve) will ultimately be forced to admit insolvency too?

kaiserhoff's picture

Good question.  Buy more time by creating bank runs???

Sometimes this is like trying to read the mind of a heroine addict.   WTF?

Speaking only for myself, it's easy to underestimate the power of well credentialed, yet profoundly stupid people.

Tasty Sandwich's picture


I was saying your idea might buy more time.  Further consolidation, etc.

But, once the government and Fed lose credibility it won't matter.

kaiserhoff's picture


Ultimately, the choice comes down to admitting insolvency or printing money.  All modern governments, (post depression, fiat currency) have chosen to print, and always will.

Good news, we will all be millionaires.

Bad news, that cup of coffee will set you back a hundred grand.


tip e. canoe's picture

once the government and Fed lose credibility it won't matter.

not unless they kick the chain of command upstairs one notch.

N2OJoe's picture

Don't forget, they have another possible out which they tned to try after mad printing doesn't work. MOAR WOAR

surf0766's picture

If you are that stupid to buy into the ARM,,, you get what you deserve.  I did no docs. liar loans in the early 90's. Anyone using them is hiding something.


Don't buy goldor silver or stocks. buy necessities. Learn from history.



Sabibaby's picture

Doesn't seem that stupid if you can just up and walk away from it, sounds like free rent!

Seasmoke's picture

Fuck Adjustable. With property taxes ,even a fixed mortgage is meaningless. WAKE THE FUCK UP, AMERICA !!

Ignatius's picture

P.T. Barnum had it right.

I am Jobe's picture

ah the great dreams that some folks follow. Dumb Fucks, and these people precreate more stupidity


SilverIsMoney's picture

As a title examiner for the largest title insurance company in the midwest I can tell you that part of the drive back to ARMs is this - all of the money we charge to include ARMs in our package gets charged to the buyer (but it's the Seller's Attorney who requests all the endorsements within the package because 99% of the time the Seller is the one getting the title insurance on his own property to make it more marketable) and yet THE ENTIRE AMOUNT PAID for ALL endorsements (including the ARM) goes to the SELLER'S ATTORNEY!

Just think about that for a second... the Seller's attorney is recommending endorsements that his own client doesn't pay for and then gets ALL of the money the BUYER pays up for them. 

Yea... nothing can go wrong here... examiners see this tragedy coming from a mile a way and all we can do is sit and watch because 99% of the world doesn't even know what we do (all the fucking work, that is). But all we're paid for is to pick and choose what isn't being insured for and what is, nothing else, and our opinions are irrelevant beyond that.

Keep stacking brothers and sisters. It's coming...

Gromit's picture

Fucking title.......very well organized criminal racket.  They wrote that it was a first - turmed out to be a second. I called the guy, he said go sue me.

Not worth the trouble.

Like I said........

In Iowa, the State handles title insurance. Costs maybe 100 bucks to insure the title to a nice home.

Like I said....

SilverIsMoney's picture

What's hard is the Libertarian in me says that the State can't run anything effectively because they are nothing more than a legalized monopoly (and we all know service suffers and costs go through the roof in a monopoly) yet actually working in title insurance pretty much proves to me why this shouldn't be left up to the private sector... so what's the solution? I think about it a lot and have been unable to come to an answer (and let it be known the gov't regulators for title are beyond worthless).

Gromit's picture

No problems in Iowa...or Canada

Like I said....

@ Silver - nothing personal I just have this bee in my bonnet about title.

Edit:  Title industry is ripe for a takedown, it's just physically dangerous IMHO to take on these folks and I can't be bothered.

The business model is "The Peoples Title Insurance Company", start by insuring exisitng condos for $100 (Zero underwriting risk) then expand out as the business flows in.

Musashi Miyamoto's picture

Industry profitability

"In 2012, according to ALTA, the industry paid out about $908 million in claims, about 8.1% percent of the $11.2 billion taken in as premiums. By comparison, the boiler insurance industry, which like title insurance requires an emphasis on inspections and risk analysis, pays 25% of its premiums in claims. As mentioned above, professionals in the land title industry seek to prevent claims through up front preventive measures before a policy is issued and therefore the industry’s claims ratio is different than other lines of insurance."

keepin the fleecin

Seasmoke's picture

You need to go to the Livinglies blog and post what you just posted here. ASAP !!

Musashi Miyamoto's picture

You ever get sick of those house-flipping radio shows?

"if the market goes down houses are cheap so its a good time to buy. if the market goes up than demand is strong so its a good time to buy."


Gromit's picture

I really don't understand why you have a problem with real estate advertising. Are you offended by new car advertising also?

Please understand that real estate sakespeople are salespeople not experts.

Musashi Miyamoto's picture

Its regular programming. People call in to ask them questions and stuff. Who listens to this horse crap? Give me back my motley fool.

Blankenstein's picture

Used home salespeople can advertise, but need quit the investment talk.  If they are giving guidance relating to investments they are entering into a fiduciary relationship and should be liable for the advice they are dispensing.

Gromit's picture

Buy buy buy!

We'll get maybe 6 months advance notivce before the average buyer/seller gets the memo I reckon.......

CheapBastard's picture

I'll take three of them. If things don't work out, I can just walk away and dump the losses on the next fellow. That's th enew American Paradigm.

Rehab Willie's picture

If the big one hits California, will the markets take that as good news?