I/O & Option ARMs, Condos, and San Diego

Recently the O.C. Register held a real estate panel with the end result being not so surprising: the panelists were bullish. From the article:

Gary Watts, an economist and broker in Mission Viejo, was the panel member most bullish on Orange County. He said home prices will shoot up 15 percent next year. Walter Hahn, a consultant and real estate economist in Irvine, said the county should keep seeing double-digit gains in home prices until the next recession.

The O.C. Register's The Morning Eye blog posted some of the panelists' comments that
seemed more grounded in reality. In particular, Scott Simon's comments were most level-headed (and, at the same time, a bit scary):

Also, (Orange County) is the hub of creative credit in the world with New Century, Ameriquest, Option One, everybody’s here.

(As home prices rose, buyers) couldn’t afford the house anymore. You want the house and suddenly New Century or someone is saying, "Well, take an interest-only loan. Instead of paying the principal, you only have to pay the interest." Then you say, "I can’t afford the house now" and they say, "Don’t even pay the interest. Let’s negatively amortize the loan."

The really negative sign for us is the fact that, last year, 82 percent of the purchase loans in the state of California -- Orange County being representative -- were either interest-only or negatively amortizing loans. We view that not as an economic choice people were making, just simply an I-can’t-afford-the-house choice.

Eep. I've talked about option ARMs before, and how they are a recipe for financial ruin, and how San Diego county led the nation in the highest percentage of interest-only loans in 2004, but I didn't realize that 82 percent of all loans in California were of one of these two varieties of "evil" loans. Scott Simon continues on with his discussion:

Raphael Bostic, USC: You are saying that some places you’re expecting, on aggregate, to go negative?

Simon: Well, it’s very unusual for them not to.

Bostic: So which places do you think?

Simon: Places that specifically worry us? San Diego worries us.

Bostic: Particularly in the condo market. I agree with that.

Simon: San Diego earliest went to the affordability product, interest-only mortgages most heavily, earliest. Biggest number of investors, earliest. And it’s probably just further along in the cycle.

Ah, good ol' San Diego, another fine distinction for my fair city... I hope San Diego is the first to crash and that prices quickly return to levels where ordinary people can afford houses without perilous loan products. It saddens me that my neighbors are becoming the f@cked borrowers SoCalMtgGuy talks about. (Ex: a coworker who bought a condo about 16 months ago using a 1-year fixed ARM, and is now having to "cut back" his lifestyle because of his increased mortgage costs...)