On the Never-Never

12 May 2006



US Banks Offer 50-Year Mortgages

US banking is a competitive business. The country is over-banked and has been for years thanks to barriers to interstate banking. As a result, banks have to compete as the seemingly eternal march of consolidation goes on. The latest “innovation” is the 50-year mortgage.

Statewide Bancorp introduced this idea back in March and says it has 220 applications. Until March, the 40-year mortgage was the longest around, and the standard was 30. There are 10- and 15-year loans out there, but their popularity has been declining as house prices have risen. Simply, the more one needs to borrow to purchase a home, the longer one needs to pay it back – unless of course, the monthly payments soar.

The Statewide deal is pretty simple, the note is payable over 50 years, and the interest rate in the first five years is fixed. After that, the rate can rise. The question for the consumer is whether he intends to stay in the house for more than 5 years. If the idea is to hold the property for a time and then re-sell it, hoping to pocket a gain, this loan offers the purchaser a bigger property for the same money. Bigger properties often yield bigger gains (or losses).

However, if the idea is to buy a nice big house and stay there to raise a family, this starts to look like a good deal only for the bank. The Fed has hiked rates 16 times since the latest cycle started, and there is talk of more to come. Oil is the far side of $70, and that is creating inflationary pressures that could well result in even higher interest rates. Occupying that property more than five years is a bet on oil price futures and interest rates in the year 2011. If one could prognosticate that well, one could pay cash for a house.

Still, there are people for whom the loan may be right, who may decide to refinance later, and Statewide is only trying to meet a market need profitably. The underlying message here, though, is that the housing market is cooling. In order to keep prices up, the financing of the house has to adapt radically. What one can afford over 50 years is much more than what one can buy over 30. Yet, it does look like the limits of rising house prices are within sight.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.


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