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Just recently, I had a discussion with a professional colleague. During our talk, I made a joke about skyrocketing real estate prices. He laughed, but also made a startling announcement: a friend of his who’s a waitress and barely has much money bought a three-bedroom house a few months back. Further, according to my colleague, she had saved only about four or five grand.

Naturally, I was incredulous. Four or five grand barely qualifies as a security deposit in some of California’s most insane real estate markets. How in high heavens was she – a waitress! – able to get a house under this stringent environment? The only thing I could think of was that we’re in a housing bubble, and we just didn’t realize it.

Now I’m no expert in real estate. However, I consistently keep track of the prices. Over the last two or three years, the valuations in my neighborhood has gone bonkers. It’s truly a wonder how anybody is able to survive. But hearing the story of a waitress buying a home here has confirmed the idea of an unsustainable housing bubble.

Of course, I have no way of truly verifying the validity of this story. However, I’m not entirely inclined to dismiss it. If we fall into a recession – and chances are we will – then sellers should sell while they can. And apparently, mortgage brokers also feel the same way.

 

Rise of Risky Mortgages Portend a Housing Bubble

Back during the last housing bubble and subsequent crisis, mortgage providers had gambled on a consistently rising real estate market. As such, they were willing to lend to subprime borrowers to soak up additional demand left unserved.

On the surface, these subprime borrowers couldn’t afford a traditional fixed-rate mortgage. To get around this problem, lenders offered riskier adjustable-rate mortgages (ARMs). Such loans featured easy payments in the first few years, only to rise dramatically later.

Of course, we all know what happened next. Once the honeymoon phase of the ARMs ran out, the higher rates kicked in. As they did, they kicked homebuyers out as they couldn’t afford the new rates.

In response to the painful lessons learned, the mortgage industry severely cut back on these risky loans. But according to The New York Times, interest-only loans are making a comeback. Moreover, the mortgage industry is pushing these loans, perhaps not as aggressively as before, but pushing nevertheless.

Because demand for real estate has slowed, lenders have more time on their hands. As we saw with the last housing bubble, that doesn’t always lead to good results.

Of course, the real estate market could hobble along for some time before we get a crash. But at this juncture, it’s worthwhile to remain vigilant. The last crash was incredibly devastating. A mere correction this time around could still wreak considerable damage.

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