Refi Bubble
Categories: Credit
Interest rates are kissing "free." With tongue. Rates almost can't get any cheaper now.
So what happens? Well, everyone with an adjustable-rate mortgage refinances it, i.e. they refinance their existing higher-interest rate loans where they're paying 6%...to now be paying 5% or less.
What's wrong with that? Nothing. It's how the capital markets work. But many of these refi people believe rates will stay low for a long, long time. And that's where the bubble danger comes in. Instead of paying 3.25% for a fixed 15-or-30-year loan, they cheap out and pay 2.7% for the adjustable. And all's well for 3 years...until we hit inflation. Hard. And The Fed raises rates a ton to cool things. LIBOR and/or whatever other metric rates are pegged to also goes up. A lot. So then you have a ton of people who could juuuust afford the 3% mortgage rate...now paying more like 5 or 6 or 7%, meaning that their mortgage costs go up astronomically (well, almost double, at least).
But that's a big probelm when it happens en masse, and you have tons of bankrtuptcies of home give-backs to deal with. A market flooded with homes for sale is a weak market. Prices fall with the glut of supply and likely declining demand, and it all just comes crashing down like a bubble that has...popped.
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Finance: What is a Bubble?5 Views
Finance allah shmoop what is ah bubble All right well
this is a bubble See what happened there got bigger
and bigger and bigger And then it popped and here's
the stock market from about nineteen Ninety two until about
two thousand It got bigger and bigger and bigger And
then it popped And yet was a bubble not just
a big fat bull market It was a crazy ludicrous
tulip mania Kind of time like start ups with almost
no revenues trading and billions of dollars Yep And tulip
mania That was a really thing One tulip sold for
forty grand go figure wasn't like if you ate it
you lived forever So yeah it was a bubble So
what caused the ninety nine bubble Well greed and it
wasn't good At least for some The internet had come
along It was a new thing consumers by the millions
could download in the privacy of their homes Art films
Yeah That's what we'll call them art films by the
terabyte money was flowing from silicon valley investors into startups
at record pace hoping to take advantage of this new
amazing internet thing and the valuations of companies got higher
And higher and higher Nasdaq went up some four hundred
percent in just half a dozen years and the blessed
cos traded at one hundred times trailing revenue not earnings
but revenue So if you think about the idea that
if you invest a dollar and you want to get
more than that back and that dollar comes from profits
of companies than one hundred times revenues cos we're probably
something like five hundred times earnings or more So for
one hundred dollars oven investment you've got like a dollar
of revenues in twenty cents of potential earnings Like maybe
a a decade later maybe yeah that's a bubble and
it burst At least you don't have that danger with
actual tulips or bitcoins Yeah they take bitcoins when you
buy tulips Would be kind of a good marriage there