The one problem that I know is inflating housing prices are interest only mortgages.
Yeah, okay, great, you now have a $500,000 home that you can mortgage for $1,500 a month. You never build up equity. You never own anything. You're making a rent payment. You're floating your variable interest rates on LIBOR instead of prime. You still have to refinance or face a balloon payment in 10-15 years that you can never pay.
Interest only mortgages are what's driving ever rising housing prices. This is true in most "hot" housing markets where they are 33-50+% of financing in the DMA.
This is a bubble, no ifs ands or buts about it.
Liquidity is the key to financial well being. Interest only mortgages allowing you to have a home above your means is a recipie for disaster.
Fully 22 percent of the borrowers who borrowed at initial rates of 2.5 percent or less during the past two years have negative equity in their homes, and 40 percent have less than 10 percent equity. The study also finds that a third of people who took out adjustable rate mortgages last year have negative equity and 52 percent have less than 10 percent equity. How is this possible? One reason is that 43 percent of first-time home buyers paid no down payment last year.
Holy &=@%ing $#!+!!!
I used the following simple formula: I had 2 car payments. When I finished paying 1 car off, I used that amount to pay of the second car off faster. Now that I have paid off the second car, I am using BOTH payments to accelerate my mortgage payments (5% fixed). I will own my condo free and clear in 5 years. It is worth apx $400,000 (I live in Los Angeles), more than 4 times what I paid for it.
People who mortgaged their new "equity" are flat out nuts. Interest only is the second most nutso thing to do.