Rising Interest Rates Mean Falling Home Prices
A recent broadcast on NPR called Buyers Face Gamble with Rising Mortgage Rates made it clear that buying a house now may be a very bad idea. While they gave some very good points they missed some very key (and much more concerning) points.
While they pointed out that its dangerous to buy now because prices are due to fall another 10% but that threat existed before interest rates rose. With interest rates rising that will be a new and different reason to drive housing prices down leading to enhanced price decreases. Afterall the logic is housing prices go up when interest rates fall because its cheaper to buy that house (you pay less on your mortgage purely because of interest rate) so you have more to bid in getting that house. Well the same logic applies in the negative. Prices go down when interest rates go up because people have to put more of their budget into servicing the mortgage debt and less into the principle so they get a smaller loan.
Oh and one other thing. With rising interest rates those that have to refinance will be less able to do so for two reasons. The comps will fall with enhanced falling prices (so they’ll get lower appraisals and won’t be able to refinance as much) and they will be less able to afford the refinance as well as the whole point of the refinance was to lower your monthly payments. Bonus issue is with falling prices they’ll just be more foreclosures anyway. The net of these two-plus issues is that foreclosure rates will increase again creating more supply providing the third impetus for housing price declines.
Don’t anyone let you believe the market turns around this year or in 2012. We’ve got until 2013/2014 before anything long term happens (not these little short-term govt incentive inspired blips) and that won’t be spectacular. Get into a mental place where a good housing market means flat growth.
June 6, 2011 at 5:12 pm
Hey Marcitz, remember when you said this a few years ago:
“My prediction (or is that a “sinking feeling”) is that this summer will feel “soft” on the peninsula and that will prick the confidence bubble leading to the same panic here that happened last year in the suburbs. This is when 30-40% price drops (peak-to-trough) become a reality in Palo Alto by summer 2010. Additionally the bank efforts to artificially restricted supply of foreclosures will finally give way as all banks decide they need to get out before its too late.”
How’d that ne work out for ya? BWAHAHAHAHAHA!!!! Man, sometimes, I just look back at your predictions and just laugh and laugh and laugh!!!
June 7, 2011 at 10:53 pm
I’m so glad you made this comment. According to Case Shiller the San Francisco region which covers Palo Alto is down 40.6% from peak as of March 2011 so I missed it by just 6 months. See this article
http://globaleconomicanalysis.blogspot.com/2011/06/case-shiller-nominal-and-real-housing.html?source=patrick.net
Oh and the fire sale is coming this summer according to CNN money so sure I missed tht by a yea
http://money.cnn.com/2011/06/01/real_estate/summer_clearance_sale/?section=patrick.net
In the end though my predictions have proven to be correct with timing (and not that big of a timing difference in the grand scheme of things) to be a bit off. My guess is that you are saying that my rediction, from both a timing and directional perspective, was wrong. Not so my home owning friend (how’s the water up there over your roof?)
Where I may be crucially wrong is in the size of the dip which may eventually top 50%. I’m assuming by your demeanor you are a homeowner and, ironically, by next year you might be longing for the day when I was actually right. BWAHAHAHAHAH!
June 8, 2011 at 2:11 pm
“According to Case Shiller the San Francisco region which covers Palo Alto is down 40.6% from peak as of March 2011″
So Case Shiller values prove you were correct? Really?
Thats funny – cause the fateful day in 2009 when you made this “40% down in Palo Alto” claim, the SF region was -40.9% from the peak according to Case Shiller, versus the -40.6% today.
Put another way, Case Shiller says SF (which covers Palo Alto) is up 0.7%, from the date of your prediction. So do you really want to use Case Shiller as proof of your vindication? Sure you dont want to try that again?
Truth be known about me. I dont own in Palo Alto, nor do I plan to (but I do have a friend in the area). I really am just a troll who delights in pointing out how tragically wrong people are. 6 years ago, I laughed mightily at all the permabulls who said certain areas are “immune”. Now I laugh just as hard at the permabears like yourself who are just as wrong as their bullish contemporaries.
BTW – thanks for the prompt response. Your 2009 claim was funny, but your most recent reply to me is hysterical!!!!
June 10, 2011 at 10:57 am
Well I’m sorry you think i am a permabear. The market will go up at some point and to your point may have in some areas. My goal is to make people think and the fact that you have put so much effort into my little blog gives me great satisfaction that I’m getting people to dig into the data.
Thank you for your support.
June 13, 2011 at 12:52 pm
Well perhaps not a permabear. A permabear would continue to claim they were “right” all along. Yet, after I showed you the foolishness of relying on Case Shiller for Palo Alto, you (rightly) abandoned that position. The fact of the matter is Palo Alto is still nowhere near 40% off peak, and you know it. Perhaps you are just more of a “reactionary” bear, being the most hysterical with your predictions at the bottom of the market. Time will tell
Glad you appreciate my looking into your post. You did cause me to put effort into this. If thats your goal, congrats.
August 22, 2011 at 11:35 pm
BTW, According to Trulia Palo Alto is down 9.0% Year-over-year (as of 8/22/11) and the tony 94301 zip code (Crescent Park) is down 33% year-over-year. OK not quite 10% but it hasn’t been a year.
http://www.trulia.com/real_estate/94301-Palo_Alto/market-trends/
Let the trend be your friend….
February 15, 2011 at 10:23 pm
THEY ARE SIMULAR in that they both never got a bubble! I moved to Ausitn from BA two years agao. I also lived in Houston, so I think I should know. No bubbles just real growth in our real estate anywheres from 10-15% a year. Just closed on a property myself that’s assessed at twice as much as it was 7 years ago. This is normal here!! Texas real estate is different.
February 15, 2011 at 10:54 pm
First of all 10-15% is NOT normal over the long-haul. The rate of inflation is normal (so 3-ish percent). Second the sign of any bubble is when people feel their market is “different”. You should check out the New York Times from last weekend where there was an article that says that cities that missed the bubble and collapse are now being hit.
I would be very careful over the next few years.
February 15, 2011 at 11:43 pm
There are billboards everywhere saying how Texas Real Estate really is different. I don’t think they’d get away with that if it wasn’t at least somehwat the case!
I have never read anything about TEXAS. When you google it and the word bubble, all you’ll see is how we completely missed it in part because of there not being as much HELOC abuse here. You can only borrow 80% of the value of your house here at a time. Us and Wyoming. I’m not bragging ya’ll! You should move to TEXAS is my point!
February 15, 2011 at 5:21 pm
You may see a short term bump in sales and possibly price as some rush in to beat rates but before you know it buyers pull back.
In a few years when you go to sell your house it will cost much more for a buyer to afford it at a higher rate.
Another problem with artificially inflating assets, its painfull when they readjust to the real world.
August 24, 2011 at 7:40 am
a real estate broker once told me the best time to buy a house is when interest rates are high (prices are down)and then you pay cash.
February 15, 2011 at 9:19 am
meanwhile, back at the tax assessors office you will notice that the property tax bills continue to increase despite falling home prices. As the tax bill increases, the affordability factor of the home decreases and people will have to offer less to buy that home. People so easily discount the effect that housing and home prices have on the overall economy. This down-turn has been a disaster and the consequences shall only get worse in the next three years
February 15, 2011 at 7:04 am
NOT true in Austin or Houston. We skpped the bubble and now we’re appreciating like wildfire. TEXAS, ya’ll!!!!!
February 15, 2011 at 5:06 pm
Hey B.K. That’s a Whopper! You make it sound like Austin and Houston are similar.