What do you think will happen when that highly paid tech worker who just got laid off, with negligible savings after all the revenge travel he or she did post-COVID, will do when his or her adjustable rate mortgage resets 2-3x higher?
Keep in mind there were plenty of smart people who opted for the lower interest rates that came with a 3, 5, 7 or 10 year ARM, or even IO ARMs, vs a higher rate but more conservative 30 year fixed mortgage.
They counted on being able to refinance when their fixed interest rate period became floating, or anticipated being able to sell prior to their rate becoming free floating.
However, all of these people will be in a tough situation when they realize that the housing market is frozen, they’re unable to sell, they’re unable to afford to refinance at 7% or 8%, and that they just lost their job. How will they able to avoid defaulting on their mortgage when their interest only (IO) adjustable rate mortgage (ARM) resets to 7.5%?
Keep in mind that in a recession, many companies are also announcing hiring freezes, especially in the tech sector which simply grew too much, too fast in recent years. As a result, while a superstar software engineer might be safe, all the recent hires in DEI, ESG, HR or other non-core roles may truly find it difficult to find a replacement job.