Refi Bubble

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.