Historically, a person put 20% down on their property as a down payment. The interest rates were high, at least 8%, sometimes over 10%. Take the house in 1970s tucson that was $30,000. Interest rate was about 10%, the down payment was 6,000, so the payment was about $250 a month.
Now, drop the down payment requirement, and drop the interest rates to 5%. that same $30,000 dollar property suddenly costs about $175. But, there are plenty of people who can afford $250. So, they value (perhaps erroneously, but follow me here) the object not as its purchase price, but rather as a comparison to what they pay as rent.
Suddenly, people are valuing the property as $45,000. But more importantly, people who don't have savings but have income are looking and saying, "I can afford a house!" Thus, demand rises along with the perceived value of the property. Then, the people with rental property look at increasing mortgages and adjust their rental properties' prices accordingly. Investors look at increasing prices and create a follower effect. Demand increases.
Rent increases. The bubble has renters facing higher costs looking at property not as an investment, but as a hedge against increasing rent costs. This isn't necessarily a bad decision: consider if you are buying in 1999. You can barely afford the property, but you are averaging 3% raises. That $35,000 salary in 1999 is $48,000 in 2010, but the housing cost is the same.
Historically, a person put 20% down on their property as a down payment. The interest rates were high, at least 8%, sometimes over 10%. Take the house in 1970s tucson that was $30,000. Interest rate was about 10%, the down payment was 6,000, so the payment was about $250 a month.
Now, drop the down payment requirement, and drop the interest rates to 5%. that same $30,000 dollar property suddenly costs about $175. But, there are plenty of people who can afford $250. So, they value (perhaps erroneously, but follow me here) the object not as its purchase price, but rather as a comparison to what they pay as rent.
Suddenly, people are valuing the property as $45,000. But more importantly, people who don't have savings but have income are looking and saying, "I can afford a house!" Thus, demand rises along with the perceived value of the property. Then, the people with rental property look at increasing mortgages and adjust their rental properties' prices accordingly. Investors look at increasing prices and create a follower effect. Demand increases.
Rent increases. The bubble has renters facing higher costs looking at property not as an investment, but as a hedge against increasing rent costs. This isn't necessarily a bad decision: consider if you are buying in 1999. You can barely afford the property, but you are averaging 3% raises. That $35,000 salary in 1999 is $48,000 in 2010, but the housing cost is the same.
The problem is if you run into this in 2006.