I firmly believe that some people will bite the big one in some areas when home prices level off or start to decline. Most people don't realize that buying properties as investments can be much more risky than investing in the stock market.
Take for example a family that stretches their income to buy a $500,000 home today with the expectation that next year it will have appreciated to $600,000. Let's assume they got an interest-only mortgage (all the rage these days) at a variable rate of 6%, which gives them a minumum payment of $2500 a month on the house. Then by year's end the interest rate has moved up to 7%, making their payment now over $2900 a month. Let's then say that the housing market has cooled off and has started slowly declining, due to oversupply and the increase in interest rates. So now they can't sell their house for more than $475,000, a $25,000 difference from what they owe, and are saddled with $2900 monthly payments which could continue to increase. They can't sell the house because they'll still owe $25,000 on it and will just have to buy another house, but with home prices sliding who wants to buy a home that will devalue? They could end up losing the property completely and then be out a lot of money and time and have to find a new place to live.
These interest-only mortgages are big-time traps. It is no better, in my opinion, than renting. None of the money you pay each month will be yours in the form of equity. The rates are usually variable and will only go up. They are very much a true gamble, like something you'd find at Vegas. The gamble is that the price of the home will increase at a greater rate than their interest rates and all their home maintenence and insurance expenses. In essense, it is like buying all the risk without buying any of the property. If you wanted to do that in a stock, it would be like you borrowing all the money to buy a stock and then hoping it moves up so you can make some kind of profit, and if it doesn't then you could lose all the money you borrowed and walk away with nothing, as well as owing someone money. Brokers can't let you do that because it is way too risky. If you want a margin account (the ability to buy securities with borrowed money) they require certain minimum amounts of actual cash in your account so that if things go south for you and they have to sell all your stock, they still have enough to pay for everything, leaving you broke. But regardless, you walk away at worst having lost all the money you started with, compared to losing money you don't even have in the real estate scenario.
