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.
